Friday, March 26, 2010

33% RATE INCREASE IN PROPERTY INSURANCE?

Remember "Drop like a Rock"?

Our Governor, Charlie Crist promised, not so long ago, that Florida property taxes and insurances would get such a wonderful cut that real estate in our state would receive an incredible boost.

Now, whoever you think are your friends in Florida Congress, read the news, and read my comments below:


From The Sun Sentinel - March 25, 2010

Senate panel passes bill allowing major home insurance rate hikes

The Senate's insurance committee passed a bill Wednesday that would essentially allow home insurance rates to rise by a statewide average of up to 33 percent in the next three years. That means premiums in South Florida could rise by more than that. "Couple that with the 10 percent annual increase passed by this committee last week, and you have huge rate increases," said Bill Newton, executive director of the Florida Consumer Action Network who spoke in opposition to the bill along with Florida Insurance Consumer Advocate Sean Shaw. Gov. Charlie Crist also made an appearance to ask lawmakers not to vote for the bill.

The bill would essentially allow automatic average statewide rate hikes of up to 5 percent the first year, 10 percent the second year and 15 percent the third year. Policyholders' premiums can increase by more or less than the statewide average rate. Supporters say the bill is needed to strengthen Florida's property insurance market, draw more insurers to the state and improve companies' ability to pay claims if a major hurricane strikes. Opponents say rates already went up in South Florida after the 2004 and 2005 hurricanes and consumers can't afford additional increases. After heated debate, the committee passed the bill, SB 876, by a 6 to 4 vote. Voting for it were Minority Leader Al Lawson, D-Tallahassee and Senators J.D. Alexander, R-Lake Wales, Mike Bennett, R-Bradenton, Chris Smith, D-Fort Lauderdale, Jeremy Ring, D-Margate, and Garrett Richter, R-Naples. Voting against it were Senate President Pro Tempore Mike Fasano, R-New Port Richey and Senators Ronda Storms, R-Brandon, Alex Villalobos, R-Miami, and Joe Negron, R-Jupiter.

Newton said he's "disturbed" that all the Democrats on the committee voted for the bill and other insurance proposals. The House insurance committee passed its version of the bill, HB 447, last week. To weigh in on this bill or others, you can find your legislators on the state's Web site.

In all truth, our Governor is not the culprit.

Perhaps his Republican friends in Tallahassee?

Oops, not so fast: Have you noticed how many Democrats have also voted for this new attack on the beleaguered homeowner in this state?

Counties, Cities, and now the State: nobody seems to understand that we are living the most trouble times in many decades. Poverty in Florida is one of the worse in the whole US. Foreclosures, Jobless claims, Deficits, are our daily bread.

But our politicians do not quite understand the necessity of downsizing. Downsizing doesn't necessarily mean reducing essential services, like education and health. It means reducing the waste, reducing luxurious offices, parties, travel expenses, level and sub-levels of unnecessary and blown up bureaucracy. Things must change because we cannot afford our and "their" lifestyle anymore. As we are forced to adjust our expenses in face of the recession and economic necessities, so must our government change their spending habits.

In the same line of action, our government must take definite steps to rein in insurance companies. Their non-ending greediness must be contained, least one of these days some genius comes up with a reform , a "public option", a "single-payer-system" or something similar to the health reform that has shaken our political landscape, only that next time it could be applicable to property and auto insurance.

Insurance companies are a big part of the problem. Unbridled and uncontrolled, they lobby and mandate at will their rules on us, as well as our elected officers.

It is evident that the consumer is powerless against their voracity . At least if he wants to buy a car, get a mortgage, or obtain health care. High rates of insurance are a large factor in denying the access to homeownership to many citizens, as are high property tax rates.

Five years since we had a major hurricane, no losses for the insurers, but still paid our premiums. We already had our rates raised after Katrina.

So what exactly happened that forced these insurance companies to pump up again their rate at this shameful levels? And how could they convince our legislators?

Without being a specialist in actuarial sciences and risks calculations, my bet is that they do it simply because they can. And they will keep doing it unless you and me do something about it.

Henry B. Nathan is a Florida Realtor at United Realty Group Inc.
Visit my website: http://www.condo-southflorida.com
where you can search for Aventura Condos, Florida Condos, Sunny Isles Condos,

Friday, March 19, 2010

Understanding Home Insurance Pricing

From time to time we read a revealing article that can change our opinion on something important.
Here is something I read about Insurance Companies and how they operate, and how our owning a home can be influenced by their behavior.

I read in the Sarasota Herald Tribune - March 15, 2010 a valuable contribution by Paige St. John. I would like my followers to read and analyze it and perhaps we could exchange thoughts about this subject.

How insurers make millions on the side

Today, nearly half of Florida's home insurance is provided by companies whose primary profit comes not from insuring homes but from diverting premiums into a host of side ventures. Investors and executives in 2008 moved $1.9 billion in policyholder money out of heavily regulated insurers, where profits are capped and dividends are restricted, to separate companies that are owned by the same people, housed at the same address and sometimes use the same employees. As soon as the money is moved, it is beyond the reach of homeowners who might need it to rebuild after a disaster.

It is also free to be paid to investors and owners as profit without interference from regulators. Meanwhile, insurance executives complained about losses and state-mandated discounts, and pressured state regulators for permission to charge homeowners more -- even to end rate regulation altogether. The payments to themselves, by and large, were legal. As Allstate and State Farm have fled the state and left homeowners scrambling for coverage, Florida lawmakers have intentionally relaxed rules designed to police insurance company profits. Regulators hoped the promise of profits would persuade investors to start more insurance companies. The Herald-Tribune spent more than a year investigating the Florida insurance industry, including reviewing the financial filings of more than 70 Florida-only companies that now provide nearly three-quarters of the private property insurance in the state.

I found out that:

• Overhead costs -- expenses not related to hurricanes or other disasters -- are 50 percent higher in Florida than the national average. The higher overhead cost Florida homeowners an added $900 million in 2009 alone.

• In cases where the Herald-Tribune could see both sides of the ledger, the overhead charges were inflated. Of the $72 million in management fees that Southern Oak paid its affiliate over five years, nearly half -- $35 million -- was profit, insurance regulators now say. Three other carriers paid themselves an average 44 percent profit.

• Some insurers devote so much of their premium to reinsurance and paying related companies they have little left for claims. Even in its first months of operation, state financial examiners said, American Keystone was structured to spend more than it collected.

• Insurers have contracted so much of their work to unregulated sister companies that some are essentially shell operations with few employees. Homeowners Choice, for instance, pays one affiliate to negotiate reinsurance contracts and another to manage policies, and buys catastrophe protection from a third.

• Lax state rules encourage executives to pay sister companies as much as possible. The Legislature barred regulators from requiring insurance affiliates to report their finances.

• Even while complaining of losses, Florida insurers from 2006 through 2008 paid $38 million in bonuses and $32 million in other perks to 180 of their officers.

The state industry's chief trade group, the Florida Insurance Council, defends internal deals as a way to provide quick returns to start-up insurance companies. Regulators bar insurance companies themselves from paying dividends to investors until they have been in business at least three years.

"Investors would simply not provide funding without generating some return each year as they are putting up money with a risk of total ruin," said Sam Miller, vice president of the council. Others say self-dealing increases the chances of ruin. "The companies are taking profits out as opposed to keeping it for future losses," said Frank Cacchione, CEO of TNC Management, a New Jersey company that sometimes audits insurers' books for private reinsurers. "When the insurance company fails, they haven't lost any money. In fact, they've made a lot of money."

HOW INSURERS GUARANTEE PROFITS

Most of the money redirected from insurers -- $710 million in 2008 alone -- goes to companies called managing general agents, or MGAs, which run insurers' day-to-day operations. Part of these fees pay legitimate expenses, such as agent commissions. But a yet-unpublished analysis by the Insurance Consumer Advocate, an independent state position created by the Legislature, found that Floridians pay 50 percent more for overhead costs than the national average. Florida residents paid an average of $434 per policy toward insurers' operating expenses, the analysis found. Across the nation, the average was $289. And because MGA fees are set as a percentage of total premiums, when insurance companies get rate increases, the MGA fee also goes up. Regulators in December granted Olympus Insurance a 25 percent increase to cover reinsurance. The advocate's office objected, noting Olympus already has one of the highest expenses of Florida insurers. The MGA would automatically receive $2 million of the $11 million rate boost for no added work. "Do these functions cost more in Florida than the rest of the country? I don't think so," said Advocate Sean Shaw. "But somehow this is happening." The Florida Insurance Council defends MGA profits. After surveying some of its members, the trade association said MGA profit margins are only 3 percent to 5 percent of total premiums -- an amount vice president Sam Miller said "is not considered excessive and does not involve a great amount of premium." However, calculating MGA profit as a percentage of MGA revenue -- the traditional way of figuring business profit margins -- shows MGA profit margins ranging from 25 percent to 50 percent.

SIDE VENTURES TURN LOSSES INTO PROFITS

Because Homeowners Choice, an insurer based in Clearwater, is publicly traded and must file financial reports with the Securities and Exchange Commission, it offers insight into how self-payments work. Financial statements filed with insurance regulators show the insurer posted a $5.6 million loss for the first nine months of 2009. "We did?" asked Jay Mahdu, the vice president of marketing and investor relations for the two-year-old company. He was more familiar with Homeowners' holding company filings with the SEC, which at the time showed a $10 million profit. (Year-end reports filed earlier this month reported 2009 losses of $650,000 for the regulated insurance company and 2009 profit of $11 million profit for the holding company.) "There is so much business in Florida that, managed well, you can do very, very well," Mahdu said. Homeowners Choice turned an insurance "loss" into a stockholder profit mainly in this fashion:

Homeowners Choice paid Homeowners Choice Managers $24 million (and $2 million more to others) in 2009 for management services that cost $15.4 million. It paid $9 million to Bermuda-based Claddaugh for reinsurance, almost all of which was likely profit because, according to state regulatory filings, none of it was used to pay claims

Homeowners concedes its profits come from itself, but says the money is pumped back into the insurer as capital contributions that allow it to offer insurance to more Floridians. "We haven't taken any money out," Mahdu said. "It's all about growth for us." Homeowners has issued no dividends to investors, but three company directors collected $1.4 million by charging for services through their own private ventures. In 2008, Homeowners Choice paid $400,000 to lease its computer billing system from a software company owned by Paresh Patel, founder of Homeowners Choice. The contract requires that Patel's insurance company is the firm's only client. Patel was also paid a total of $525,000 in bonuses for the past two years. Another owner/director, developer Gregory Politis, leases Homeowners part of the third floor of a Clearwater office building he owns, for $150,000 a year. And in 2008, Homeowners paid $643,000 for legal services from the firm of another director, Martin Traber. Mahdu said the many Homeowners Choice subsidiaries are the artificial construct of corporate attorneys. "There is no such thing as the division. A Homeowners employee is a Homeowners employee," he said. "At the end of the day, we live and die on the bottom line. It doesn't matter which entity posts a profit or loss."

PAYING AFFILIATES FOR BACKUP COVERAGE

One way insurers move money out of the regulated business is by forming their own reinsurance companies. Essentially, they sell insurance to themselves. In 2007, one of the reinsurers with which United Property and Casualty did business was a Grand Cayman Island reinsurer called Caymaanz. What made the transaction stand out was how much United paid for reinsurance from Caymaanz. In return for $6.5 million in storm protection, the Florida property insurer paid Caymaanz $6.5 million -- $5.5 million for the coverage and $1 million for the purchase of Caymaanz stock. If there had been a hurricane, United would have gotten back essentially what it paid in. Without a storm, Caymaanz and its owners walked away with an untaxed, unregulated profit. Don Cronin, chief executive of United, said he did not remember what United made on the deal. One of the Caymaanz owners was also a United director. Florida incorporation records show Caymaanz is owned by a Tampa workers compensation insurer named Sunz. One of the Sunz Group directors, according to the records, was Ocala horse feed manufacturer Greg Branch -- at the time also the chairman of United Property and Casualty. United did not report the transaction as an affiliated purchase because, said Cronin, "it didn't meet the technical definition." No-risk reinsurance deals in which firms basically pay up front what they expect to collect were at the root of former New York Attorney General Eliot Spitzer's financial fraud investigations of the insurance industry in 2007. In the aftermath, regulators adopted restrictions on such deals.

Cronin said the Caymaanz contract passed that test because it also included prepaid coverage for a second hurricane. Under the right conditions, Cronin said, United could have collected $13 million, twice what it paid for the coverage. He would not say who arranged the transaction, but said Branch, chairman of United's board and chairman of Sunz's reinsurance committee, abstained from the board vote approving it.

EXECUTIVES ACCUSED OF STRIPPING MILLIONS

Florida homeowners are still paying the $810 million bill for the failure of the Poe Insurance Group, the costliest property insurance failure in state history. State investigators now believe the bailout was made worse by executives grabbing tens of millions of dollars before regulators could close the deteriorating company. They did it by funneling money into unregulated sister companies, steering the money to investors and owners instead of to homeowners, according to allegations laid out in a civil court case filed by Florida Insurance receiver's office in Leon County Circuit Court. Over four years, through what the court complaint alleges was a "fraudulent scheme," Poe founder and former Tampa Mayor William Poe Sr. received more than $30 million. Another $1 million went to his nonprofit foundation. In addition, instead of paying hurricane claims, Poe's managing agency paid off $25 million in debt for which Poe was personally liable and kept $35 million in premium fees it did not earn, the complaint states. That money could have helped thousands of Poe customers left with worthless insurance after the 2004-05 hurricane season and forced to seek payment through a state solvency fund. Instead it enriched company insiders or softened their financial losses, the state argues. Attorneys for the Poe family would not comment, citing pending litigation. But statements made in court show that while they contest the allegation of fraud, they do not dispute the amounts taken -- just whose money it was. They contend the family put most of what was not eaten up by taxes back into the insurer. "There is no insurance company monies that ever went to the Poes," attorney Harley Reidel said in a court hearing last year.

The Poe family has responded by filing for bankruptcy protection and seeking federal court orders barring the state from pursuing its claims in circuit court. The insurers left behind $1.5 billion in policyholder claims and less than half the money needed to pay those bills. Florida consumers are on the hook for the rest, as fees on their own home premiums from the Florida Insurance Guaranty Association.

LOOPHOLE LETS PROFITS SLIP THROUGH

Florida's Office of Insurance Regulation polices almost every aspect of the insurance industry. But when it comes to following the money paid to affiliates, the OIR is largely benched.

Lawmakers intentionally made it so. Like most states in the mid- 1990s, Florida adopted model laws aimed at regulating how insurers use managing companies called MGAs. But in Florida, the Legislature added words excluding the most common kind of managing agent in the state, those controlled by the insurance company's owners. So there are laws that require managing agents to charge a fair rate and allow regulators to audit their books, and laws that impose penalties for violators. But those laws do not apply if the insurance company owners form their own MGA and charge themselves for the services. "Enabling insurers to have wholly owned MGAs operate without oversight, that's what I see is the problem," said Shaw, the insurance consumer advocate. Florida's insurance industry trade group says regulators and insurers have worked out a compromise -- inserting language into management contracts that stipulate regulators have a right to look at certain financial reports. Officials at the Office of Insurance Regulation refused to say how often they conducted such reviews, contending it was a "legal research question" the agency did not have resources to answer. At least twice, the agency has ordered insurers to reduce their MGA fees. In the case of First Home, affiliates were also ordered to return $1.3 million in management fees. On Tuesday, Southern Oak was ordered to show why it should not be required to return $10 million in "excessive profit," a portion of the $35 million in profit regulators said the MGA made off the insurer since its inception in 2004. Southern Oak CEO Tony Loughman said those profits were "consistently" invested back into the insurance company. Annual financial filings show Southern Oak paid $72 million to its managing agent since 2004, returning only $12.6 million. A second order, signed Friday, allowed Southern Oak to keep its MGA commissions as they are, but to return a portion of them if the insurer loses money.

The fees OIR sought to restrict were approved by the agency in 2004 -- when the company was launched by a former candidate for governor, Stephen Pajcic, a prominent Democrat who also owns a Jacksonville law firm -- and again in 2005 and 2007. In interviews, the state's insurance solvency chief said that in the past, her office did not look at the flow of secondary profits through affiliates, because it allowed company owners to pay off their own loans used to start the insurer. Allowing these profits "facilitated more capital to our marketplace" said Robin Westcott, solvency director for the agency's property insurance division. OIR is now paying more attention because, she said, "it can be manipulated to take money out of the companies." The state industry's chief trade group, the Florida Insurance Council, defends internal deals as a way to provide quick returns to start-up insurance companies. Regulators bar insurance companies themselves from paying dividends to investors until they have been in business at least three years. "Investors would simply not provide funding without generating some return each year as they are putting up money with a risk of total ruin," said Sam Miller, vice president of the council. Others say self-dealing increases the chances of ruin. "The companies are taking profits out as opposed to keeping it for future losses," said Frank Cacchione, CEO of TNC Management, a New Jersey company that sometimes audits insurers' books for private reinsurers. "When the insurance company fails, they haven't lost any money. In fact, they've made a lot of money."

A second order, signed Friday, allowed Southern Oak to keep its MGA commissions as they are, but to return a portion of them if the insurer loses money. The fees OIR sought to restrict were approved by the agency in 2004 -- when the company was launched by a former candidate for governor, Stephen Pajcic, a prominent Democrat who also owns a Jacksonville law firm -- and again in 2005 and 2007. In interviews, the state's insurance solvency chief said that in the past, her office did not look at the flow of secondary profits through affiliates, because it allowed company owners to pay off their own loans used to start the insurer. Allowing these profits "facilitated more capital to our marketplace" said Robin Westcott, solvency director for the agency's property insurance division.

OIR is now paying more attention because, she said, "it can be manipulated to take money out of the companies."And because MGA fees are set as a percentage of total premiums, when insurance companies get rate increases, the MGA fee also goes up. Regulators in December granted Olympus Insurance a 25 percent increase to cover reinsurance. The advocate's office objected, noting Olympus already has one of the highest expenses of Florida insurers. The MGA would automatically receive $2 million of the $11 million rate boost for no added work. "Do these functions cost more in Florida than the rest of the country? I don't think so," said Advocate Sean Shaw. "But somehow this is happening." The Florida Insurance Council defends MGA profits. After surveying some of its members, the trade association said MGA profit margins are only 3 percent to 5 percent of total premiums -- an amount vice president Sam Miller said "is not considered excessive and does not involve a great amount of premium." However, calculating MGA profit as a percentage of MGA revenue -- the traditional way of figuring business profit margins -- shows MGA profit margins ranging from 25 percent to 50 percent.

DEAL HELPS BANK, BUT NOT POLICYHOLDERS

While it is common for Florida-only insurers to do business with themselves, Hillcrest Insurance did a deal with its founder that cost policyholders. In early 2009, according to filings with the National Association of Insurance Commissioners, Hillcrest Insurance bought $600,000 in bank stock from the insurance company's founder, Vernon D. Smith. Seven months later, the stock -- in a banking group that Smith owned -- was written off by the insurer as worthless. The purchase is noted in the quarterly NAIC financial filings. Hillcrest's March 31 report to regulators identified Smith as the "vendor" who sold it the stock, while other filings describe the shares as coming from a company director. Smith did not return phone calls to his home. Neither did his daughter and son-in-law, who serve as Hillcrest's chairman and CEO. They formed Hillcrest in 2005, with 90 percent of its ownership coming from a family trust that state incorporation records show Vernon D. Smith controlled. Smith was regarded as a pillar of Florida's community banking scene. Over decades he had organized three different "Riverside" banking groups with branches stretching from St. Augustine to Cape Coral. He was a major donor for Indian River Community College, owner of a small newspaper chain and adviser to the Florida Highway Patrol. But at the time of the stock purchase, Smith's Riverside banking empire was in trouble. One group was beset by financial rating downgrades and bad loans, another was closing offices, and the third was seized by the FDIC. It was in that environment that Hillcrest reported to the National Association of Insurance Commissioners that it paid $600,000 for 4,000 shares of stock in Riverside Banking Co. By September, the insurance company wrote off that purchase, declaring the stock worthless. The company's filings show the write-down contributed to a $680,000 loss that September. To pay its bills, Hillcrest pulled money from its policyholder surplus, reducing the amount of money set aside to pay future claims.

The Herald-Tribune also attempted to reach Smith and his family through their insurance company, without success. There is no Hillcrest office to contact. The company pays the Tower Hill insurance group to run its business. "We're what you call a 'virtual operation,'" said Hillcrest chief finance officer William Thompson, who earns his $172,000 salary working from Tallahassee. Subsequently, on Dec. 21, Hillcrest sold the shares to a charity. The reported buyer, Big Brothers Big Sisters of St. Lucie, paid $1,000.

The Sarasota Herald Tribune – March 15, 2010 - By Paige St. John




Henry B. Nathan is a Florida Realtor at United Realty Group Inc.
Visit my website: http://www.condo-southflorida.com
where you can search for Aventura Condos, Florida Condos, Sunny Isles Condos,

Saturday, March 13, 2010

Feeling the pain

I have read in the news:

Africa Israel affiliate sells condo sites at big discount

Africa Israel Investments, one of the hardest-hit companies from South Florida’s real estate collapse, has unloaded two condominium development sites for a discount of about $17 miillion. AI Florida Holdings, an Africa Israel affiliate, sold the site of the proposed 288-condo project Soleil and an existing office building at 3050 Biscayne Blvd. in Miami for $8 million.

It also sold a property at 500 Alton Road in Miami Beach that was planned to be the site of a 66-condo tower called Vitri for $5 million. AI Florida paid a combined $29.6 million for the properties in 2004. The sales, first reported by CondoVultures.com, closed on Feb. 18. The buyers of both sites are affiliates of Miami developer Crescent Heights, according to state corporate records. Calls to AI Florida chief executive Richard Marin were not immediately returned.

Africa Israel, led by Israeli-Russian diamond billionaire Lev Leviev, has been unloading prime properties at steep discounts since late 2008. At that time, Africa Israel said it would sell off assets to cover $472 million in bonds maturing by the end of 2010. Since then, the company has sold 518,000 square feet of developable land for $52 million, or $100 per square foot, according to CondoVultures.com, a Bal Harbour real estate consulting firm. In the most expensive South Florida land sale of 2009, Africa Isael in September unloaded a 7-acre parcel in Miami’s Park West neighborhood to the developers of the proposed Miami Worldcenter for $39 million, less than half of the original $88.7 million contract price.

An affiliate of Africa-Israel also took a big loss last June in the sale of an office complex at 1101 Brickell Ave. in Miami. It sold the 488,449-square-foot tower for $33.2 million. Africa-Israel bought the property, which covers nearly 4 acres, for $70 million in 2005. “Despite being a very shrewd organization overall, Africa Israel came to town not understanding the Miami marketplace,” said Condo Vultures principal Peter Zalewski. “They overpaid for a bunch of different dirt, and in the end their timing was off. Now they’re paying the penalty for that.” The Soleil and Vitri sales also resulted in a more than 50 percent discount for 3050 Biscayne Properties and 500 Alton Road Ventures, both Crescent Heights affiliates. Crescent Heights president Russell Galbut and Crescent attorney Sharon Christenbury did not immediately return calls seeking comment. A 150,000-square-foot site, the Soleil property includes a 90,480-square-foot office building described by Zalewski as “antiquated” and “C-quality at best.”

The Vitri site, located near The 5th and Alton retail center, is more suited today for a hotel or small office development, he said. With the Soleil and Vitri acquisitions and late 2008 purchase of a 60,000-square-foot condo development site in the Brickell area, Crescent affiliates have made three bargain land acquisitions since the residential market tanked. The $9 million purchase of the Premiere Towers site near Brickell Avenue was less than the $13.57 million loan seller Willy Bermello got from Colonial Bank when he refinanced in July 2006.

The three purchases — particularly the Soleil and Vitril deals —indicate Crescent executives sense South Florida’s residential market has reached the bottom, Zalewski said. “As much as Africa Israel doesn’t understand the Miami market, the Crescent affiliates are the complete opposite,” he said. “Their people on the ground have knowledge, context and cash,” Zalewski said. “From what these people have accomplished previously, I’d bet my money on them being right” about the bottom.

Crescent historically has specialized in condo conversion projects, so buying undeveloped land could lead to the company’s selling the properties once pricing improves, Zalewski said. “Land banking makes sense — don’t underestimate the value of the approvals received to build both projects — but that doesn’t seem like their forte,” he said. “They might have a deal already cut [with another buyer] who didn’t have the direct access to Africa Israel. “[Crescent] always makes sure to have an exit strategy.”

March 04, 2010 - From Daily Business Review


Henry B. Nathan is a Florida Realtor at United Realty Group Inc.
Visit my website: http://www.condo-southflorida.com
where you can search for Aventura Condos, Florida Condos, Sunny Isles Condos,

Friday, March 12, 2010

More on the Short Sales Saga

Read at Realtors.org (Florida Realtors website)

Government urges short sales, but experts aren’t sure they will help

With the highly touted federal mortgage-modification program falling short of its target numbers, the government has looked into alternatives to foreclosure and come up with a possible, though not original, solution: The short sale, a transaction in which the lender accepts less than the balance owed on the mortgage. Beginning April 5, under new Treasury Department rules, short sales will be presented as the potential next step for homeowners who are rejected by or fail to make the grade for the federal Home Affordable Modification Program (HAMP).

RealtyTrac chief economist Rick Sharga suggested that offering the short-sale program is the administration’s acknowledgment that its current mortgage-modification effort “can’t solve the foreclosure problem by itself.” Kevin Gillen, vice president of Econsult of Philadelphia, said there was both statistical and anecdotal evidence that lenders have been holding off on foreclosure proceedings. “No doubt that part of this is due to staff shortages relative to the volume of delinquencies, but it’s also due to uncertainty over near-term government policy,” he said. Sharga sees positive elements in the new guidelines: Both homeowners and mortgage servicers will have financial incentive to participate in short sales; there are limited payouts for second lienholders, “and paperwork is standardized, which makes it easier for everyone to comply.” The new Home Affordable Foreclosure Alternative program will run until Dec. 31, 2012. Among its provisions:

• The lender must offer a short sale in writing to the borrower within 30 days after the borrower either is ruled ineligible for mortgage modification under the HAMP program or has been ruled unable to sustain payments under a trial plan.

• A borrower may receive up to $1,500 to assist with relocation expenses.

• Incentives of $1,000 will be offered to lenders for each completed short sale. For each deed in lieu of foreclosure, in which the borrower voluntarily transfers the property to the lender, $1,000 will be paid to the lender.

• A lender with a second lien on the property will get up to $3,000 of the short-sale proceeds, or can pursue a short sale outside the program if it doesn’t agree to share.

• The lender will not be permitted to reduce the real estate agent’s commission after an offer on a property has been received.

Currently, short sales don’t make up a big piece of the real estate market, either regionally or nationwide, for a variety of reasons. One is they tend to be difficult and time-consuming.

“I handled a short sale of a condo in Bensalem (Pa.) that took a year,” said real estate broker Christopher J. Artur. Typically, there is “so much aggravation and red tape involved that some buyers get so fed up they walk away.” Nationally, just 14 percent of all existing-home transactions in January were short sales, the National Association of Realtors says. In the Philadelphia region, they made up 6.9 percent of total homes for sale at the end of January, said Art Herling, regional vice president at Long & Foster Real Estate. “I call short sales ‘organized chaos,’ “ said Noelle Barbone, office manager of Weichert Realtors’ Media office.

Each lender works short sales differently, “at their own pace, and it depends on how behind (the homeowners) are on mortgage payments, if the house is worth less than they owe, and whether or not foreclosure paperwork has been filed.” The new program is unlikely to make short sales easier, even as an alternative to foreclosure. “What one needs in a short sale is time,” Barbone said. But these days, as buyers race to meet the April 30 agreement-of-sale deadline for the federal tax credit, time is money. “I had first-time buyers this weekend with 20 percent down, and we found two houses they liked,” said Cheryl Miller of Long & Foster’s Blue Bell office.

Both were short sales, however, and neither the seller nor the agent could give a definite timeline for even seeing an executed agreement of sale, she said. “Timing is pretty critical for the first-time buyer, and viable houses that are short sales are remaining unsold” as a result, Miller said. Sharga doesn’t think the new short-sale program will be the answer the government seeks. “While we’ll likely see an increase in the number of short sales, I doubt that the reality will live up to the hype.”

From FloridaRealtors.org - March 12, 2010


I am a real estate professional at United Realty Group Inc.
You can visit my website: http://www.condo-southflorida.com/ where you can search for Hallandale Beach Condos, Sunny Isles Condos