I find many homeowners who are afraid to ask what a short sale is. They are afraid to ask because by now you would think that everyone would know what a short sale is. But until now, they never wanted or needed to know. Let’s try to bring them up to speed.
It’s no surprise that the real estate market has hit an extraordinary low under the most extraordinary circumstances. We have never experienced anything like this before. We heard all the talk back in 2005 and 2006 of a real estate bubble. An overinflated real estate market that was ultimately doomed and due to burst at any time. Did we listen then either? Some did. But many covered their ears wanting to believe that the market appreciation would never end. Or if it had to, home values would “level off” before they would begin to rise once more. We could wait for that to happen while we are sitting on our personal nest eggs imagining what to do with all that built up equity in our homes.
Many refinanced their mortgages to reduce their interest rates to 1% while taking out as much cash as they could possibly get their hands on. These loans were as easy to get as candy at the candy store. Lenders were passing out negative amortization loans or option arm loans to anyone and everyone who put their hand out. They were told that there was no risk because they would simply refinance again when the interest rate was set to adjust in three to five years. Plenty of time and with home values on the rise a refinance would be a piece of cake. So have your candy and eat your cake too! Wow.
Sound familiar? You bet it does. Nearly 25% of all mortgages are underwater and climbing according to The Daily Record. That’s one in four homeowners who have no equity, no ability to refinance their mortgage and no ability to move because there is no feasible way to sell their home to pay off their existing mortgage. What to do?
The good news is that there are options. The bad news is that none of them are quick, efficient, pleasant or easy. One such option offered to a struggling, under water homeowner is a loan modification which is really a refinance under a different name. A loan modification is proving to be a pipe dream with a less than 5% chance of ultimate approval or success. But once they are declined for a loan modification they can qualify for a HAFA short sale which stands for Home Affordable Foreclosure Alternative. This is an Obama idea set up to prevent more homes from going to foreclosure where they ultimately become bank owned properties. Bank owned properties are those homes on any street that sit vacant with dead landscaping, broken windows, a deteriorating appearance, green swimming pools and a true eyesore to drive by every day on your busy daily travels.
According to Standard & Poor’s Shadow Inventory Report which we define as outstanding properties that are (or were recently) 90 days or more delinquent on mortgage payments, in foreclosure, or real estate owned (REO)—that haven’t yet hit the market.”
S&P claims there is over 40 months supply of this shadow inventory. In Layman’s terms this means that homes will sit vacant and abandoned for many months or years before they will be used for the purpose they were built – to house people.
How successful has the HAFA program been since its release in April 2010? Are banks actually cooperating with the idea of short sales over foreclosures? Some.
It is estimated that nearly 30% of underwater mortgages are successfully completing short sale approvals with lenders. This statistic is up from 10% in 2009 and 18% in 2010 according to the tracking firm DataQuick Information Systems.
Although a short sale approval is entirely voluntary by a lender it is apparent that many lenders see the benefit of approving a short sale over allowing a property to go to foreclosure. Banks calculate the difference in loss between what they stand to receive from a short sale vs. what they would ultimately lose through foreclosure where it will be added to their portfolio of existing REO’s or “Real Estate Owned”.
The benefit of a HAFA short sale is that it is designed to stream line the overall approval processing time, wipe out any recourse debt to the borrower, extinguish the threat of a junior lien holder from going after the borrower for unpaid debt and provide a monetary incentive to both the loan servicer and the homeowner in the form of a “cash for keys” agreement at the close of escrow. The bad news is that only a handful of homeowners are granted a short sale approval through the HAFA program after keeping the buyer and homeowner on hold for two to three months. If they are denied a short sale approval through the HAFA program the lenders will consider an approval using a standard short sale method hence, beginning the process all over again with no hope of a “cash for keys” incentive when they are done.
This song and dance number makes you wonder if the homeowner should have applied for a standard short sale approval to begin with since the buyer just walked away from the transaction because they found a better home around the corner and the scheduled foreclosure date is looming closer and closer.
Granted, the lender will place the foreclosure sale date on “hold” while processing the short sale approval but with a casual sense of urgency. Many times the lender will continue on calendar for the foreclosure sale date with monthly extensions provided on the final day just before the auction date; seemingly to make everyone involved sweat it out hoping and praying each month for another 30 day extension. And on occasion you will hear stories of properties going to sale in the midst of the short sale approval process only because one department forgot to notify the other department to postpone the sale date on time. Banks say, “Oops! My bad, so sorry for your loss. Now move along!”
You must remember that the banks are not people. The banks are strictly acting on their own agenda based on which scenario best benefits THEM, not the borrower. The borrower is begging for forgiveness to an institution for the unpaid debt they owe in order to sell their home. This constitutes tens to hundreds of thousands of dollars of debt relief to the borrower that the banks had planned on receiving when the loan was originally approved and secured by a signed promissory note and recorded deed of trust. Even though a rising sense of frustration and surmounting stress continues to build with each day that ticks by while at the mercy of a lender that doesn’t operate in any human fashion with feelings and emotion, the homeowner must try to remember that they could ultimately be free of a mass amount of monetary debt with the ability to once again purchase a home using government backed financing in as little as two years time. Keep your eye on that achievement and thank your lucky stars to be done with it.
So, what’s so short about a short sale? Nothing. The short is merely a term to describe that the lender will be coming out “short” on the payback of their loan balance while the borrower will be free to move on with their life and in time, forget about this chapter in history.
Written by Diane Wheatley, Real Estate Broker located in Southern California.
April 20, 2011.