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Home-selling's short sale headaches
A reduced price sign sits in front of a house in Glendale, Calif.
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TESS VIGELAND: Here's another sad statistic in the housing crisis. Take a look around your neighborhood. Out of every 10 houses, odds are one of them is behind on mortgage payments. The Mortgage Bankers Association says that's the worst showing since it started keeping records in 1972.
As homeowners find themselves in trouble and unable to sell for anything resembling an asking price, they're turning to short sales. That's where you work with the bank to sell for less than you owe on the mortgage.
But as Peter O'Dowd reports from station KJZZ in Phoenix, convincing the bank to let you off the hook can be a logistical nightmare.
Peter O'Dowd: You can knock all day on the front door of this house in Peoria, Ariz., and no one will answer. Chris George and his family haven't lived here since June 2008. That's the year George lost his job and eventually, his life savings.
When I called George in California, he said one of the few things he actually wants to lose is the house itself.
Chris George: This was the house that we moved into after we got married. And this is the house that we had our first son in and we loved this place. And now it's just turned into a burden that we can't wait to get rid of.
Back in 2005, George bought the house for $209,000 with no down payment. He moved his family near Palm Springs last summer to find work. But before George abandoned this house, he asked the bank for permission to sell it at a loss. He even offered to pay the remainder of the mortgage himself.
George: The difference would have come in around five or $10,000. That's pretty easy to do.
The bank didn't like that idea, and the George family's finances spiraled downward. Fifteen months later, the house is scheduled for auction. And only now has the lender changed its tune. This time it will consider a short sale if the couple pays the difference in the mortgage. Well, now the gap between the loan amount and the sale price is more like $50,000. George says the worst part has been dealing with the excruciating wait.
Jo Watson hears that complaint a lot. She's the CEO of a local real estate agency.
Jo Watson: If you're thinking this is going to be over in 20 or 30 days, then you're setting yourself up for failure or a lot of frustration.
It appears that frustration is mounting. In Phoenix, where housing prices have fallen drastically, realtors say nearly half of all homes under contract are pending short sales. Some of those sales will take more than nine months to close. Watson says many agents are overwhelmed and undertrained.
Watson: Agents don't like to hear that they're part of the problem, but we are.
That's because a short sale transaction is complicated. Before a lender swallows a loss, it wants to be sure the homeowner isn't just trying to wiggle out of a devalued property. So a seller needs to show hardship with stacks of tax records and financial statements. If agents do a poor job collecting this information, the wait gets longer.
Watson says banks are to blame, too. Bank A has one set of rules. Bank B has another. And Watson says those bank policies can change with little warning.
Watson: We've had short sales where we have submitted offers and gotten a no. And then we pulled them back, resubmitted the offer a week later and gotten a yes.
John Mechem: We understand the frustration on the consumers' end. We understand the frustration on the real-estate brokers' end.
John Mechem is with the Mortgage Bankers Association. He says banks are slammed with short sales and dealing with the paperwork takes time.
Mechem: A bank is in the business of trying to minimize loses whether its through a short sale or a foreclosure, so there is a lot of due diligence that needs to be done.
Part of that diligence includes measuring financial hardship, and that can be the trickiest part of a short sale. Technically, sellers just need to show that if they don't sell the house soon, they'll eventually lose it to foreclosure. But the reality is different. Even banks acknowledge that homeowners in default will be the first in line. As a result, some people stop paying their mortgage and destroy their credit in the process.
Short sales aren't just a headache for sellers. Josiah Pinner is a first-time buyer, who had been shopping for houses for months. From his car, he points out a two-story stucco house that he put an offer on back in March.
Josiah Pinner: I kind of just put all my eggs in one basket there. I just pretty much expected it would go through.
Four months later, the bank came back with answer that made little sense to him. It would agree to a short sale only if the seller paid an extra $3,000 to the bank. The owner was broke and couldn't do it, but Pinner was willing to take on the cost himself.
Pinner: If I could roll it into my loan, you know, but that just wasn't an option for them.
The deal was dead, and Pinner feared if he had to wait for another short sale to go through he would miss out on President Obama's home buyer tax credit.
So he got back into his car and drove a mile down the street where he found a nearly identical house already in foreclosure. With no need for a short sale, that deal was sealed in a week.
In Phoenix, I'm Peter O'Dowd for Marketplace Money.
I was turned down 3 times by my servicer. Finally
I went online and found the Presidents name for Fannie Mae and PHH Mortgage, than i sent them an email and C.c. Timothy Geithner, Barbara Boxer, Barney Franke, my congressman, and all the local tv newstations, along with Msnbc, 60 minutes, Anderson Cooper, Etc. And I received a phone call from PHH 3hours later and now have a signed, notarized Home loan modifcation for 40 years and my interest starts at 2% . So please everyone take note the media is a very powerful venue and can work in your favor. The financial institutions have been holding back and discouraging and disuading the American Public for too long also Financial Institutions put us in this mess and they're going to pay us back by making our home loans affordable & livable. Which is why our Government agreed to BAIL them out. So all because there's not enough Chief's to go around and check on every bank and mortgage company it's your job to email your congressman and any other person in the media spotlight that you so choose. you will be grateful that you read this article. May America start to sleep again, and this ill empower the economy as well as not taxing our animal shelters. Perfectly fine people earning less money than they did last year or before that, and ar still earning and can pay something qualify for a Loan Modification. So do a little research and find emails for media and get busy America. Let's show the world we can't be beat.
Thank you for your time,
Andrea Joy Kowsky-Allan
I am a Title Agent and freelance-writer in Florida, closing lots of deals involving short-sales. The stories above don’t include the short-sales approved all the time when Realtor® and Attorney Negotiators follow the requirements of the lender.
When the borrower applied for the loan, the lender asked for the same information they want now--except now they also want a hardship letter of explanation. Choosing to see this as daunting is a mistake. By following the rules—an approval is more likely.
It makes sense . . . a lender’s requirements to make a decision concerning getting out of a loan are the same, or similar, as their requirements to make a decision to approve the loan. As for time—it is only a couple of weeks longer than the approval process.
Sellers, be responsive and cooperative. Buyers, check out the experience of your Realtor® or Attorney before signing the contract, and start on your new loan immediately. In addition, Sellers, call the IRS, and check out the tax consequences.
Great article which underscores the difficulties that many homeowners are experiencing. It also points up a couple of do's and don'ts in my view:
Do not stop paying your mortgage if you can afford to pay it. It does wreck your credit. If you have no money you have no money, but some people are being given bad advice. We often hear, "The only way the bank will talk to you is if you stop paying your mortgage." This is utter nonsense.
Do not take foreclosure or bankruptcy lightly. These also mar your credit rating (especially bankruptcy) and it can take years to repair it. Many attorneys recommend bankruptcy (for which they will collect fees) when a short sale is a better route for the consumer.
Do not try to negotiate with lenders if you are a homeowner or a realtor with no experience in negotiating with a lender.
Do hire a company that negotiates short sales for a living. They have people that know how to talk to a lender. They don't do magic and will run into the same frustrations as you do, but why take on the hassle yourself? A reputable workout company will charge the homeowner nothing for their services.
Do not pay any company up-front fees or guarantee payments to them to work out a deal with your lender. If a company suggests payments from the homeowner, run in the other direction.
Do bear in mind that for the next couple of years, if a lender does forgive debt on a primary residence as the result of a short sale, the forgiven debt is NON-TAXABLE (up to $500,000). This is a big plus for going the short sale route.
