I just added an article to www.AustinMarketNews.com about mortgage lenders getting cozier with the idea of doing short sales instead of foreclosures (Banks warming up to short sales to reduce foreclosures). Having worked short sales, representing buyers and sellers over the past several years, I’ll believe it when I see it.
The last sentence of the article highlighted a key issue that most consumers, and many inexperienced real estate agents, don’t understand. That is that just being upside-down in your mortgage and having a hard time making the payments don’t necessarily justify a short sale. You must be able to prove, and document, a genuine financial hardship — usually some change in your life since your mortgage was originated — that makes it impossible for you to continue making house payments. The “short sale package” required by the lender will be exhaustive — I have faxes 75 pages of documents to lenders on behalf of my seller-clients in these situations. If you thought the lender knew a lot about you when you applied for the mortgage, think again. In addition, you must write a “hardship letter” explaining exactly what happened that prevents you from making payments you agreed to previously and what you have done to try to adjust.
There is another important complication that results from the “creative” mortgage industry during the 4 or 5 years before the “mortgage meltdown.” Specifically, the very common use of second liens. Up until 2003 or so, and again in 2009, FHA loans were and are the preferred vehicle for homebuyers without much cash for down payment and closing costs. In between, there were a variety of “80-15-5” (5% down, 80% first lien, 15% second lien) products and others like them: “80-10-10” — 10% down and a 10% second lien. There are even several sources for “80-20” loans, in which the homebuyer borrowed 80% of their new home’s value from one lender and borrowed all of their 20% down payment from a second lender, frequently on the assumption that the second lien would be refinanced at the end of two years to avoid a very significant “rate reset.” In each of these situations, the borrower could generally avoid the cost of Private Mortgage Insurance because, from the perspective of the first lien-holder, they actually made a 20% down payment.
Add to that bit of creative financing the fact that in many cases home purchase prices were “grossed up” so the seller could cover most or all of the buyer’s closing costs. Voila! You now owe $210,000 for a house that was worth $200,000 on the day you bought it, and you have absolutely no “skin in the game.” Sure, nobody wants to have a foreclosure on their credit report, but in this situation if you end up there, it really didn’t cost you anything. You would have been paying rent somewhere anyway!
Back to the short sale: In the $200,000 example above, you owe the first lender $160,000, and you owe the second lender another $40,000 — and they both have to approve the short sale. If that happens at all, it can take months. Meanwhile, you — the homeowner and wanna-be home seller — have a parade of prospective buyers who (a) have apartment or other home leases expiring in 60 days or less and can’t wait for both banks to make decisions, (b) have their own homes on the market or under contract and can’t wait for both banks to make decision, or (c) are investors who can wait, but require a substantial discount from market price in order for their business model to work.
On rare occasions a “typical” homebuyer is willing and able to wait through the long delays that will still be required for short sales, even with new “guidelines” coming from the Federal government. (See New Short Sale Guidelines — Wait and See.) However, we are now in the part of the market cycle in most of the U.S. where prices and interest rates are likely to be rising over the next several months. In Austin and Central Texas, prices probably won’t escalate as quickly as in other places, simply because our home values didn’t decline significantly here as they did in California, Arizona, Nevada, and Florida over the past couple of years. Nonetheless, as a buyer, even in Austin, why would I wait 3 or 4 months (or longer), all the while watching other attractive homes and low interest rates come and go, when I could still get a “no” answer on the short sale and have to start completely over?
As the title of this post suggests, I am skeptical that we will see a massive wave of successful short sales any time soon. We can certainly hope, but I believe this will continue to be a painful process for almost everyone involved.
Bill Morris on Austin Real Estate 
I know what you mean. My husband and I have a listing on a short sale right now. Another agent previously had the listing. He was a supposed short sale expert. The clients owe 270K on the combined loans. The other agent listed it for sale at 225K. He got a contract that bank of America would not approve. Bank of America own the 1st and the 2nd. ( I guess they bought the company that had the second and acquired the note) The bank rejected the buyers offer for 225K and then when they came back and offered 230K they rejected that as well.
The thing that doesnt make any sense here is that Bank of America wont say what they will take. Now they are in line to foreclose on January 5. We have the property on the market for 255K. It is very frustrating because if they will take 245K — I would like to lower the price to that. But I dont want to lower the price too low like the previous listing agent did. So we are left with a guessing game and this is something that has a significant impact on our clients.
The bank wants us to re-submit all updated financial information. So we resubmitted the whole package. They said the package that the other agent submitted several months back was “too old” .
Where would you go with this file at this point??
Get your grandmother to pray about it?
Get a voo doo doll and try to cast a spell on the asset manager?
Posted by Dena Davis | December 10, 2009, 3:41 AMDena, having Grandma pray looks like the best option! It has always seemed to me that loss mitigation departments viewed their function as slowing things down enough to let the foreclosure department do its job. I have not read all of the new “guidelines” but what I have read doesn’t seem to really change that. Compliance looks entirely voluntary, and I don’t see anything that will motivate subordinate lenders to get on board. (Interesting that you have the same bank in 1st and 2nd, but I’ll bet they manage them as entirely separate files.)
It seems to me that the only thing that might change this at some point is when the major banks decide that they own enough houses, and that they’re even willing to toss a bone to 2nd lien holders to avoid another foreclosure. Oh well, I still think it’s time to call Grandma!
Posted by billmorrisrealtor | December 10, 2009, 4:41 AMWriting that last comment reminded me of a couple of related “right hand-left hand” issues:
(1) In October 2008 I sold a listing where the seller was behind on payments but had not received a deficiency notice or notice of foreclosure. It closed and funded, payoff was sent and acknowleged. etc. Two months later I got a call from that buyer’s agent wondering why the house was on a foreclosure auction list. The payoff department at the bank apparently never got around to telling the foreclosure department to stop.
(2) A couple of months ago I had a buyer who made an offer on a short sale listing. It was with a short sale specialist that I really do have confidence in, and this is not a criticism of that listing brokerage. Unfortunately, that bank had communication problems, too. After the short sale listing was signed and my client’s offer was submitted to the seller and to the lender, the listing manager called to tell me “king’s X.” The property was foreclosed about a week after the short sale listing went Active.
Hiring more people into loss mitigation departments won’t fix this kind of process issue!
Posted by billmorrisrealtor | December 10, 2009, 4:49 AM