Understanding Short Sales Coldwell Banker Northern California
Folsom Office

"Hire the Realtor who doesn't look (or work) like just another agent."

There are two categories of Short Sales:  a) "Short Sale - Active" are properties where offers are being solicited; and, b) "Short Sale - Contingent" where offer(s) have been submitted to the lenders for acceptance.  Short Sale properties are only shown as "Pending" following lender's approval and acceptance by the borrower.  Regardless of status, the senior lien holder may choose to move to preforeclosure or foreclosure at any time, even during escrow.  In the event the borrower chooses to seek bankruptcy protection during escrow, the transaction will be halted.


How did this all begin?

Current market turmoil can be tied directly to the level of subprime adjustable rate mortgage loans (ARMs) offered several years ago which peaked in 2003-2006.  Buyers simply believed the upward spiral of home appreciation, low interest rates and easy money flow would continue.  The concept of "leverage" was abused in many cases.  In still others, some lenders' greed coupled with unsuspecting or poorly informed borrowers resulted in many households simply not being able to refinance or afford their monthly mortgage debt. 

The chart below tracks the level of Adjustable Rate Mortgages due to reset through 2012.  Note while the initial wave of these resets from 2006 peaked in October 2007 and May 2008 was followed by a steep decline from September 2008 through May 2009, the level of Option ARM, Agency and Unsecuretized ARMs will begin to increase in April 2009 and carry through October 2011.  This sustained period give cause for concern as the government considers assistance to troubled homeowners.

  

Why some banks decline approval of a short sale. 

Let’s start at the beginning. A ‘Short Sale’, by definition, is where the Seller owes more than the value of the property. Although the Seller (holding legal title) may offer the property for sale and enter into a sales transaction, the transaction is subject to Bank or Lender approval. As a matter of course, only about 1 property in 10 is actually sold through the Short Sale process which can take from 1 month to 1 year to complete.

Most people are mistakenly lead down a path that suggests they are ‘entitled’ to a Short Sale and can simply offer their home in an effort to relieve their debt. What they fail to realize … and what many real estate agents also fail to do … is to ensure that the Lender will accept and approve the property sale. 

Much of the decision is related to the type of loan …

  1. Is this a purchase money loan or a refinance? It is important to know the difference. A ‘purchase money’ loan is one where the Lender has recourse (can recover) because the property is the ‘security’ for the loan. If it is a ‘refinance’ loan or money taken out by the Seller after they acquired the property, the Lender has the right to recover their loss from other assets by means of a judicial foreclosure. So, if the Lender on a refinance loan believes that there are other assets to pursue, they are less likely to grant a short sale.
  2. How much is the Seller really worth? Lenders are requiring proof that the seller is no longer capable of making payments. If the Lender finds … through tax records or audits … that the Seller has a reasonable income, they are less likely to grant a Short Sale.
  3. Are their ‘junior lien holders’ … loans or other encumbrances? If these owed parties are unwilling to ‘forgive’ the money owed them, the Lender is also less likely to grand a Short Sale.
  4. Is the Short Sale necessary to cover a tax lien or other judgments? The fact that the Seller has other financial problems will not make the Lender more sympathetic to the Seller and may well prevent the possibility of a Short Sale.
  5. Is the Seller still making payments? If so, the Lender is less likely to approve a Short Sale.  After all, the Lender is in the business of lending money and expects to be repaid.
  6. Who is the Buyer? Lenders are very careful to investigate the opportunity for fraud by their borrowers. They are suspicious whenever the Buyer is a real estate licensee, or, is in any way related to, or known by, the Seller. It is imperative the transaction is at ‘arms length.’
  7. Who is making the decision to grant the Short Sale? Within the Lender’s organization, people overseeing Short Sales and Bank Repossessions are not dependent on one another for job security. Their job performance is not tied to prevention of Short Sales, Foreclosures or Repossessions.
  8. Is a Notice of Default already recorded? If the property is in default, this is not a true Short Sale situation. If the timing for the foreclosure process has already commenced, the Seller needs to take immediate action and seek advice from their attorney or other financial advisor because the Lender has already chosen the course of action they wish to pursue. Realtors and real estate sales licensees are not qualified to offer advice to Sellers in this situation.

     

HELP FOR TROUBLED BORROWERS FACING INTEREST RATE INCREASES OR BANK FORECLOSURE

The most important advice for borrowers: Call the HOPE hotline now at 888-995-4673. 

There are a number of new efforts to help borrowers who may be subject to changes in their loan program. The recently established National Counseling Hotline will put callers in contact for HUD-approved counselors affiliated with the non-profit Homeownership Preservation Foundation. Call the "HOPE NOW" hotline at 888-995-4673 to receive qualified guidance without charge.  There are different programs for different borrower situations:

  1. Owners who are able to stay current even with an interest rate reset.

 

Solution: Counseling and refinancing. Lenders may be able to take these borrowers through a fast track process into a more affordable loan.

Potential Pitfall: Prepayment penalties may apply. Borrowers are encouraged to time their refinancing to after the rate reset, since penalties often apply only during the initial rate period of the loan.
  1. Owners who face default after an interest rate reset.

Solution: Counseling and rate freeze of up to five years. To qualify, they must be ineligible for refinancing (e.g., have a loan-to-value ration of greater than 97%), occupy the property as a primary residence, and have a credit score of less than 660 that hasn't improved more than 10% since the loan was originated.

Potential Pitfall: The rate freeze is temporary; borrowers still need to work out a long-term solution.

3.  Owners already in default.

Solution: Counseling and a loss-mitigation strategy, such as a "short sale" or "deed in lieu of foreclosure". Under the mortgage debt forgiveness law signed by President Bush December 20, 2007, borrowers who receive debt forgiveness as part of a loan workout over the next three years won't have to pay federal tax on the forgiven amount.

Potential Pitfall: Those who don't call in time may not be able to avoid foreclosure.