There was a time, not so long ago, when a high percentage of the residential closings that we were doing were short sales. Short sales really ramped up following the bursting of the housing bubble and then peaked during the foreclosure crisis.  We all know how we got there and we remember the no doc, no review teaser loans.  Short sales were a fact of life.  We represented both buyers and sellers in short sales.  In both cases, we were at the mercy of the lenders in addressing the ridiculous number of requirements for approvals and then waiting for months on end for the approvals to come back.

Fortunately, those days are behind us. Short sales are rare, but not completely gone.  So, if you are selling you’re house, how do you know if a short sale is right for you and what will a short sale mean for you?  I haven’t thought much about these questions for a while, but like most of my blog posts, I am inspired to write about this now because recently, a new client inquired about short sales.  The client was transferred from South Florida to Atlanta, leaving behind a house with an outstanding mortgage balance (combined 1st and second) of over $800,000.  The house is not yet listed for sale, though the client has already relocated.  The agent expects that the house will sell for under $700,000.  The client wanted to know what to do and what will happen.  His first question was whether we should apply for short sale approval with the lenders now.

The answer is no. Obviously, if the agent is correct, there will be a short sale.  However, until a contract is signed, there is no approval to obtain from the lenders because we don’t know the amount of the deficiency.  And, because there are 2 lenders, the contract might be enough to satisfy the 1st mortgage leaving the 2nd unpaid.  If the 1st insists upon full payment, the dynamics of the negotiations would change completely.

In addition, in order to approve a short sale, lenders require an appraisal of the property. The appraisal must be by an approved appraiser and can’t be too old.  So, we couldn’t submit an appraisal yet.  The appraisal might be stale by the time a contract is signed.

Another factor is the client’s ability to pay the deficiency. If the client is liquid or has net worth or otherwise has income, lenders are less willing to write off the deficiency.  Where 2 lenders are involved, the client has a bigger hurdle, especially if the 1st mortgagee takes all of the sales proceeds.  Attempting to obtain pre-contract approval would bring attention to these issues far too early in the process.

At this point, I suggested to the client that it would be a bad idea to have any conversation with either lender until there was a contract in place. Once a contract has been signed, it should be submitted to each lender for approval and a case made for the short sale.  Here, the arguments have to be made that the client is unable to pay the deficiency.  I explained that lenders are supposed to make this decision on a primarily objective basis, but we can give subjective reasons for an economic hardship.  But, since we are not in the crisis mode any more, it is now difficult to predict how lenders will lenders will react and that the client needs to be prepared to address the deficiency.

Short sales can’t be counted on as escape routes for home owners or as a simple alternative to the foreclosure process any more. Lenders are less willing to write off deficiencies without a compelling economic hardship.  Because there isn’t a back log of short sales to approve, lenders will carefully review every request for short sale.  If you have other options, you should consider them as well.

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        HR 3700, The Housing Opportunity Through Modernization Act passed its first major test, clearing the House of Representatives, 427-6, on February 2, 2016. The Senate will now consider the Bill and has referred it to the Banking, Finance and Urban Affairs Committee.

        I have previously written about this legislation (see post Congress Gives Attention to Antiquated FHA Policies). The legislation, proposed by Representative Blaine Luetkemeyer (R, MO), will modernize FHA policies and will more families buy homes.  The legislation is supported by the National Association of Realtors.

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Borrowers need help. Although the worst of the foreclosure crisis is apparently behind us, many homeowners are still dealing with upside down mortgages that are in default or on the verge of default. Foreclosure is not always the best way to resolve the situation for a troubled homeowner. Yet lenders and servicers are still slow to help.

President Obama’s HAMP and HARP programs were designed to offer relief. In essence, these programs were created to allow borrowers whose home values were less than the outstanding balance of their mortgage to reduce the principal balance, interest rates and therefore, monthly payments so as to be able to afford to stay in their homes. (Information about HAMP and HARP can be found at http://www.hmpadmin.com and http://www.harpprogram.org.) However, no standards or rules were implemented which require banks to act with any urgency to approve a borrower’s modification application. As such, the approval process for loan modifications often takes months, sometimes over a year, resulting in the defaulting borrower to accrue insurmountable default rate interest and causing the new payment amount to be only nominally lower than the prior payment amount. This bank practice continues today.

Similarly, borrowers fortunate enough to find buyers for their homes need approval from their servicers or lenders for the resulting short sales. Again, no guidelines or rules require lenders to act promptly in approving a request for short sale and often, potential buyers grow frustrated with the delays and cancel the contracts. “The Prompt Notification of Short Sale Act”, S.361, a bill designed to speed up the short sale approval process,  stalled for over two years in committee and ultimately died when the 113th Congress adjourned last year. But there is hope.   Representative Brian Higgins (D, NY) re-introduced a modified version of the Act on July 23, 2015, now titled “The Vacant Homes Act” (H.R. 3203).

If passed, the Act would require lenders and loan servicers to decide whether to approve a short sale within 90 days from receipt of notice of an offer from the owner of a home in foreclosure. If the offer is rejected, the “Mortgage Owner” must provide the reason for the rejection and the rejection must provide a counteroffer which includes an alternative price which would be acceptable to the Mortgage Owner, together with an economic analysis which demonstrates a reasonable expectation of the expected market value of the property one year following the 90-day period.  This is a big improvement from the legislation proposed in the last Congress which simply provided that the lender or loan servicer had 30 days from “completion of the file” in which to approve the short sale.  The prior legislation did not define completion of the file, leaving borrowers at lenders’ mercy because checklists were open ended as is the current practice.  Representative Higgins has addressed this problem by starting the clock upon the date that the borrower notifies the lender of the pending sale.  While lenders and loan servicers will likely require the same information they now require from borrowers in order to approve the request for short sale, the impetus will be on the lenders and loan servicers to make sure that the information is timely received.  The proposed Act also requires Mortgage Owners to negotiate with borrowers rather than allow an outright rejection of a proposed short sale.  This provision would add more certainty for potential buyers.

The House Financial Services Committee should take action on this important legislation to move it forward quickly.  Similar legislation should be offered for modifications, workouts and deeds in lieu of foreclosure.  As lenders and servicers continue to delay working out these loans and mitigating losses, the foreclosure backlog increases when dockets could and should be cleared quickly.  This legislation offers simple relief for homeowners needing relief.

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