The Saga of Short Sales

I recently started working on my 4th deal this year involving a short sale. For those of you not familiar with the term, a short sale is one where the seller is upside down on their mortgage relative to the sales price of the house — and rather than the seller being willing (or able) to make up the difference, the seller turns to the lender to accept a lower payout amount than the loan balance.

Sounds simple, but it isn't at all. Lender procedures for reviewing and approving short sale applications are convoluted, inconsistent and inefficient at best. At worst, they're something out of a Kafka novel, and make the IRS or NY Dept. of Motor Vehicles seem like Nordstrom. I'm not exaggerating. If the lender loses the application or supporting documentation only once during the process, you're doing well. Often when something isn't just right, the whole package is kicked back and you start again at the back of the line. And the Kafka cherry on the sundae? Supporting documentation, like BPO's (broker price opinions) or seller financial statements, usually have to be dated within a certain period of time of the short sale approval. So even if the application has sat on the reviewer's desk for two or three months (so the delay is totally in their court), they'll throw the application back because the supporting documentation (which they required just to get it to that reviewer's desk) is now out of date.

You may think that the short sale hell that lenders put these sellers through is a just punishment for these "bad, bad borrowers" who got in over their heads. But a short sale is really in the lender's interest; it will usually return a lot more of the principal to the mortgage investor than the other option, foreclosure.

The other party that suffers through this is the buyer. Short sale approvals can take 3 or 4 months, and that's if all the ducks are lined up and the paperwork is in order. Short sale reviews that drag on for six months or more aren't unheard of. Buyers can be out a couple of thousand bucks for inspections and contract preparation with little assurance the deal will ultimately be approved — because the lenders don't publicize their approval guidelines, and even if they did, they change more often than Madonna's personas.

That doesn't mean, however, that someone experienced in short sales can't 'reverse engineer' the factors likely to result in approval. There are a few threads that seem to run through most successful short sales:

• The seller should be behind in their mortgage payments, although the number of months behind to consider a short sale application varies by lender.
• The lender will likely have started the foreclosure process by filing a lis pendens or "notice of foreclosure" against the property.
• The seller must be able to demonstrate hardship — such as a loss of job or reduction in income — and preferably not have the ability to make up the shortfall with other assets. The fact that the house is worth less than the mortgage payoff amount on its own isn't sufficient to get the lender to write off the shortfall.
• The house has been on the market for a reasonable period of time, with regular price reductions and no offers sufficient to pay off the loan.
• Recent comparable sales showing that support the contract price.

Unfortunately, a lot of agents don't have short sale experience or have a grasp of the prerequisites for a successful short sale. I see all the time in the broker comments section of listings "subject to third party approval" (which is Realtor code for 'short sale'). When I call the listing agent about it, I ask about the short sale "set up" (the items in my list above) to determine the likelihood of short sale approval. I'm struck by how many agents believe that simply being upside down in a mortgage is sufficient for a short sale, and aren't able to discuss what steps have been taken to position the house for likely approval.

Short sales are a fact of real estate life. At the top of my real estate wish list for 2010 would be a desire that the lenders process them more consistently, efficiently and quickly. But that's probably about as likely as me growing a new head of hair. In the meantime, all of us involved in real estate are going to have to be more adept at working short sales within the current (and very frustrating) system, because I expect short sales are unlikely to disappear into a footnote in the near future.

Comments

[JGrim]

David, there still continue to be short sales?
WOW...we are years from hitting bottom.

[Nest Dweller]

"Lender procedures for reviewing and approving short sale applications are convoluted, inconsistent and inefficient at best. At worst, they're something out of a Kafka novel, and make the IRS or NY Dept. of Motor Vehicles seem like Nordstrom. I'm not exaggerating."

It's writing like this that keeps me returning to your blog.

Now, if you'll excuse me, my son Gregor has decided to turn into large insect and I have to go throw apples at him.

[John]

Hey Dave,

Normally I just lurk here on your blog, but since I have been dealing with the same headaches, I thought this info would be helpful to you and your readers. Just yesterday the U.S. Treasury set new short sale guidelines. I attached the link below. I guess the jury is out on whether it will help, but the ten day deadline on a response sounds like a god send.

http://news.yahoo.com/s/nm/20091130/bs_nm/us_treasury_shortsales

John Ducey

[David Knudsen]

John, thanks so much for that info. I found the actual guidelines online at https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf - all 43 pages.

Very interesting. A few notable tidbits. The effective date for the new guidelines is April 5, 2010. The touted features apply primarily to borrowers who have attempted the loan modification route (HAMP), and not been accepted, rejected the offered terms for a modification or failed the trial period, and a a short sale rather than foreclosure is the best route out for the borrower. There is a method in the guidelines to proceed to a short sale without having applied for HAMP, but to do so it appears that a borrower has to be HAMP-eligible — and HAMP eligibility requires that a residence be a primary home.

There are a whole lot of prerequisites for qualifying for the 10 day approval. But this is a HUGE step in the right direction, to streamline the short sale process. Now maybe NYSAR will come up with an actually useful continuing education class, on how this will work.