As we wind down 2010 in Real Estate there have been big changes in how short sales are being negotiated that ultimately will affect how long this market will continue. First, just the amount of attention given to short sales in 2010 was more than ever before. For regular sellers, they likely had an appraisal or even a sale affected by lowball short sales happening in their neighborhood. For Banks and investors, they invested huge capital into processing short sales as they were inundated with short sale requests by upside down sellers. Buyers continued to be frustrated by prices that were too good to be true and turn times on offers that still require many months in most cases. Many buyers will now tell their agents, “don’t even show me a short sale!” Finally, realtors continue to be confounded by how to best process them and to understand why some are approved and some are denied. This yearend report will be for every one of these people because the simple reality is that short sales will dominate the market for at least the next 3, and possibly 4 or 5, years. Today, short sales represent 47% percent of the active inventory in Santa Clarita (535 listings). Short sales represent 64% of the homes in escrow. So, with Santa Clarita still a valley that has about 24% of its homes in a no equity or negative equity position, like it or not, we will have to deal with each upside down property one home at a time – for a long time. For this reason we need more timely and accurate information that can be shared with everyone. Bank of America has a new guideline? Hafa is having little impact? Chase is charging off seconds after 2 missed payments? Let’s get the word out; this way people know what to expect BEFORE they start and don’t waste everyone’s time!
So what is really happening with these transactions? Let’s start with something I tell every potential short seller that wants to hire me- “There is no manual.” There is no clear, consistent set of rules for how they work. The reality is that some transactions are easier and some lenders are better than others. Wells Fargo used to be impossible to deal with and today they are clearly the easiest, most responsive major lender to work with. Next, is my standard disclaimer, “I am not an attorney or tax professional and am neither qualified nor allowed to give such advice.” The opinions I am sharing are from our recent experiences in helping people attempt to keep their homes or sell them short of what is owed with no further recourse. We have a team of legal and tax professionals which handle the questions sellers have about what their choices are, we handle the negotiations when clients decide that short sale is their best option. So, because it seems every month there is something new to learn, here is a basic primer for people who may be wondering what to do with an upside down property and what they might expect if they do put it on the market.
Let’s start with a few basic tips to be aware of:
First, if you have one loan a short sale is much easier than if you have 2 or 3.
Second, if you have 2 loans and they are your original loans from when you purchased, not a refinance, you have far more leverage with your lender to be fully released from your obligation.
Third, if you have 2 loans and the second has “Mortgage Insurance” your short sale will far more often be denied.
Fourth, if your loan was not sold off and is what we call a “portfolio loan” it means that we deal directly with the lender; they are not representing some unknown, unseen investor. These short sales typically go much quicker and are far easier on the seller. Many Credit Unions are great to work with because they own the loan. The way to find out if your loan is still owned by The Bank of America, Chase, Wells Fargo’s of the world is to ask a loan counselor if they have “delegated authority”. If so, they likely own it. Unfortunately, only about 10% of the time will this be the case.
Fifth, if you have not missed a payment but might in the future (due to job or income changes), many lenders will now approve short sales without missing payments when they perceive that hardship may occur in the future. This is considered “imminent default” and in 2010 we successfully closed short sales with no payments missed for the first time.
Sixth, we are definitely seeing less willingness on the lenders part to delay foreclosure sales. Wells Fargo stated in October they will give one extension for short sales in escrow past the scheduled foreclosure sale and that is it. We all have seen homes that have been in short sale escrow for many months. It appears that this will happen less in the future. This means that it behooves sellers to get an offer at least 90 days before a property in default is scheduled to go to sale.
Seventh, sellers that have “recourse loans” (in which the loan is a refinanced loan or a second in which cash was taken out), need to be prepared to bring something to the table. Lenders are rarely letting them off the hook with no seller contribution. Further, lenders such as Chase are evaluating loans in default after 2 months, determining if they are upside down and if so, selling them to collection companies. These Companies are impossible to negotiate reasonably with. For this reason, sellers with second loans that are recourse are now being advised to not miss payments so that a negotiation with their lender can occur before it is “charged off”.
Eighth, the big “HAFA Hoopla” of last Spring that was supposed to speed everything up and give seller’s a financial incentive to short sale has been no help at all in doing so. If anything, our experience is that it adds an extra layer of bureaucracy that actually slows down the process and we are advising clients that want a quick answer to actually opt out of Hafa.
Ninth, lenders heard the criticism about short sales being underpriced and are now getting their appraisals done faster and often advising the agent to adjust prices accordingly. Clueless realtors that price homes too far under market are often raising prices tens of thousands of dollars once the Bank tells them they won’t accept such a low price.
Last, most major lenders are now doing short sales electronically, in which financials, offers and other paperwork is emailed. They will require 2 years tax returns, financial worksheet, pay stubs and a letter of explanation as to why the short sale is being requested. Getting this information to them accurately and completely means that a negotiator (the person that ultimately conveys the acceptance or rejection) can answer that much sooner. This change from manual to electronic really helps expedite information to investors that ultimately call the shots. Bank of America, the largest processor of short sales switched to this early in 2010. They are better, but still the lender that takes the longest. Ask your lender if they are doing this. Let’s finish then with a basic breakdown of the most common short sale situations.
1. Purchase money/1 Loan: this is the seller that bought a home, DID NOT REFI, and has one loan on their principal residence. They are upside down and maybe tried to modify their loan without success. This is generally the EASIEST short sale to do. The big change is that earlier this year the lender would not talk to you without a “seller’s package” (their financials and hardship letter) and an offer. Today, some lenders will actually pre-approve a price and terms and often CALL ME before the home is on the market. They realize that it is in everyone’s best interest to sell instead of keep the home and I have even had people that hadn’t missed a payment get approved for these. Some lenders (Wells, Citi, GMAC, Credit unions) are much faster than others (Chase, Bank of America). All lenders though are much better than a year ago.
2. Purchase Money/2 loans: Any realtor will tell you that when there is a second loan in which there is a large loss it takes a lot more work. The first lender wants any and all of the proceeds with only a very modest contribution to the second. When Bank of America is the first loan they rarely will approve any more than $3,000. When there is a second loan, it is usually a HELOC or similar “recourse loan.” If the first is paid off with no shortage and the second gets a good portion of the money repaid, they almost always go through. If the first is also short and the second gets little or nothing, look out. They will usually demand a minimum of 20% pay off in exchange for letting the seller off the hook (Settlement). We have recently been successful in getting these types closed with 10% going to the 2nd lender. That is usually best case in exchange for release of the obligation.
3. One or Two Loans with a Refinanced Mortgage or HELOC: Who didn’t refinance in the last few years? Many potential sellers do not understand that an original purchase money loan and a refinanced loan are two COMPLETELY DIFFERENT types of short sales when it comes to recourse. They are still doable but the lender is in a much stronger position to demand seller contribution because of potential recourse. Many lenders (especially Chase) will sell their loans to collection companies very early in the default process (sometimes after only 2 or 3 missed payments) and getting those loans approved as short sales once “charged off” is next to impossible. Short sales on 2nd/Vacation Homes can still be done, but because they are not a “principal residence,” some of the tax rules and recourse rules are tricky. The agent must ask for a full release in the negotiation to avoid seller obligation down the road.
For homeowners that have 3 loans, the negotiation almost always involves some contribution from the first lender to the second AND a seller contribution to the second and the third. We see these rarely and they are very challenging. As always, sellers that have consistent, open communication with their lenders have the greatest success and least surprises.
My advice to anyone who wants to sell and is upside down is to hire an experienced, professional team. Attorney, CPA and Realtor are all crucial advisors to a successful Short Sale transaction.
