About 18 months ago I wrote about how an avalanche of short sales had come on the market, frustrating sellers, buyers and lenders attempting to process them. My message at the time was–basically–they take forever, they are rarely successful and lenders don’t seem to know what to do with them or how to answer homeowners questions about tax implications, etc. I summarized for buyers: “foreclosures good, short sales bad”. For sellers I advised consulting your tax and legal professional, I’ll try to help you if I can and I likely can’t answer your questions. As an agent, I really didn’t want to have anything to do with them, and neither did many other realtors. We wouldn’t list them if there was more than one loan, and we wouldn’t show and sell them because the foreclosures were plentiful and the response time was so much quicker. Well, what a difference the last 18 months have made! Let’s start with what I believe are a few important, “We all don’t agree on everything that is happening in Real Estate but we likely can agree on…” statements:
First, as people that either own Real Estate or work in the industry, we must accept that virtually everyone wants transparency and stability in the market. Transparency in terms of understanding where all of the upside down and defaulting properties are and are likely to end up, and stability in terms of pricing so that normalcy to the market can occur. It’s not a stretch to say that almost all the affordability numbers are in line again, especially in the lower price ranges where we have had a housing shortage for all of 2009. Let’s also agree that price stabilty is the #1 desired goal for homeowners, lenders (less foreclosures), and buyers to feel comfortable in purchasing and for overall economic confidence. Price stability also solves most of the problems that the Government has been trying to solve with the Housing crisis. Agreed?
Second, let’s accept the fact that prices will go down if supply exceeds demand and will especially go down if foreclosures dominate the inventory. Foreclosures are a fraction of what they were a year ago for a variety of reasons including the fact that lenders want to avoid them at all costs. Let’s also agree that people will only walk away from their homes if there is no equity–a situation that occurs to a fairly high percentage of homes in Santa Clarita in particular, and California in general.
Third, let’s agree that people are mostly motivated by their own self-interest–they will walk away if they have no equity and especially if they are really upside down. It’s not uncommon for me to talk to people that owe $50,000-$150,000 more than their home is worth. In those situations–even if their lender offers an incredible loan modification–it’s a very risky situation for the lender to be in. Further, if we do not stop prices from falling it will lead to even more foreclosures which will lead to more falling values, etc.
In other words STABILITY in pricing is key to all of the things that everyone wants, but is currently being sabotaged by the big elephant in the room–the inability of people that are upside-down to have their loan amount changed to market value by a loan modification or some other means and that isn’t likely to change any time soon. In other words if there was some way that all the people that owe way more than their house is worth could somehow “reset” their value to today’s values, they wouldn’t leave and stability would occur sooner.
Up until now the lending community has adamantly opposed any kind of “cram down” in loan amounts to today’s values, even though it would certainly reduce the amount of foreclosures in the future. Loan modifications, though better than 9 months ago, are not going to solve the problem either if a homeowner doesn’t want to stay in an upside down home. Enter then, the short sale as another solution to the problem of price stability.
It would take too long to explain all of the changes I have seen with respect to Lender’s attitudes toward short sales, but let’s just say that they want to do them…a lot. Foreclosure is terribly expensive–politically and financially. Now when a homeowner inquires about loan modification and is less than thrilled with the result, the BANK WILL OFTEN TELL them to short sale. Understand that this is completely opposite from 18 months ago when lenders didn’t seem to understand–or believe–exactly how serious this situation is. Today, lenders like Bank of America have been working on platforms that will allow the process to be shortened and clearly understood by all concerned. Outsource companies that, in the past, have only handled foreclosures are now setting up with their lender clients “pre-approved short sale” divisions with agents specifically trained to handle them, just like foreclosures. Legal and tax professionals have started pointing out the very clear differences between foreclosure and short sale and what we didn’t fully grasp a year ago is now clear–there is no disputing that to a homeowner comparing just walking away (foreclosure) to attempting to sell there are benefits to credit, how quickly they can buy again, tax and deficiency issues as well as the ethical issue of not honoring the loan commitment. In other words, there are huge pushes by everyone (Government, lenders, servicers, etc) to work it out not walk away, and they will make it worth your while to do so.
In the past 3 months I have seen short sales approved in less than a month, short sales approved when the homeowner had not missed a payment and short sales approved by both lenders when there was more than one loan (still the biggest problem). I have had homeowners call me saying “my lender suggested I call an experienced short sale realtor”. This month, I saw a client that did a short sale in June, apply for and receive a new loan (at todays market values, get it?), to buy their new home. So it seems that the lenders want to do them, agents are willing to work on them, often because there is so little for sale other than short sales, and the government has offered incentives to lenders and homeowners to pursue them over foreclosure. Finally, the next 12 months will likely tell if the upside-down homeowner will be able to sell short and ultimately “reset” their loan amount into today’s value situation by buying again shortly thereafter. If so, we may see, along with modifications, another piece in the market stability puzzle that everyone desires. See the attached “Short Sale vs Foreclosure” sheet for more details.
Posted by nealweichel 