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Short Sale Process Can Help Solve Foreclosure Problem - 2009-04-19 |
As we progress into the first year of the Obama administration, we are still in an economic slump. In the residential real estate market, we have a huge glut of existing bank-owned homes that are preventing the open market from functioning properly. In addition, low consumer confidence is preventing the average buyer from buying their next home.
As recently as October of 2008, banks believed that they would be bailed out by the Troubled Asset Relief Program (TARP), but the Bush administration changed course later that year and announced that it would not be using government funds to purchase troubled assets.
The latest direction of the Treasury and their $750 billion bailout is to offer banks the opportunity to sell non-voting preferred stock to the government and agree to pay approximately 8% return on that stock. So far, that approach has not had the desired effect of easing lending.
Regardless of their situations, the banking system in America today is extremely reluctant to make any loans except to their best customers, and then only for a short term and at a variable rate.
Now, more than ever, the lenders need to sell this excess of homes that they have foreclosed. But they still are overlooking one solution that could stem the flow of future foreclosures. That solution is called a short sale.
A short sale is nothing more than accepting a discounted payoff on the loan balance when a borrower is facing foreclosure, and it makes sense for the bank when the situation indicates that the bank will end up owning the house.
According to figures from the Mortgage Bankers Association, when a bank takes back ownership of a house through the foreclosure process, that bank will end up losing around $35,000 by the time they get the house sold, sometimes many months later.
Here’s how a short sale can work:
1. The owner of a home facing foreclosure often tries to sell their home in hopes of paying off the mortgage. It is then that the owner recognizes they owe more on the house than it will sell for, and contacts the lender asking for help.
2. The lender contacts an independent appraiser or broker, and pays for a drive-by assessment of the home’s value in today’s market. This way, the lender gets a true picture of the situation they are facing. If they simply foreclose, they will end up owning a house that is worth less than the loan balance.
3. With the lender’s permission, the house is now relisted with a broker, often at a more attractive price, in the hope of attracting any buyer at almost any offering price. At this point, the owner has agreed to receive nothing for the sale of his house in exchange for being relieved of financial liability.
4. A prospective buyer, lured by the possibility of a bargain price, makes a formal offer on a traditional contract form, in which the offer is likely well below the current balance on the home’s existing loan.
5. This is where the tricky part starts. The lender’s loss mitigation department must process the requested short sale and get it closed before the lender’s collection department gets the foreclosure sale completed. Often one department doesn’t seem to know what the other is doing.
6. One of the biggest hurdles to a successful short sale is that lenders insist on requiring documentation of a borrower’s “hardship” situation. In other words, if you can truly prove that your horrible situation is not your fault, then maybe the lender will take pity on you. The truth is that the lender is only considering a short sale because it is in the lender’s best interest to do so - not because they are trying to be noble.
7. Specialists at the lender have to try to determine how much of a loss is likely if they have to take the house back, and whether or not the offer on the table is a better deal for the lender. Typically, the buyer’s first offer is rejected or countered as the lender seeks to get every possible dollar toward paying off the loan.
8. Finally, if the moon and the stars align properly, and if the lender accepts the borrower’s hardship explanation, then a deal is struck and the modified offer is accepted. Approval to close is granted and the buyer usually gets a bargain house. Unfortunately, this whole process can take up to six months, and there is no guarantee of success along the way.
While this is a greatly oversimplified list of steps, it points out some of the hoops brokers and buyers must jump through to complete the short sale. Every time the lender can prevent a house entering the foreclosure process, the smaller the number of bank owned homes there are to be sold, and the closer we are to a normal market.
Recent numbers indicate that short sales account for about one-eighth of the volume of foreclosures in the nation today, but that number appears to be rising. That’s good news for lenders, borrowers and potential buyers.
The lender avoids another bank-owned home and can now concentrate on selling the houses it already owns. And hopefully it has lost less money than it otherwise might have.
The former borrower walks away from a house in which his loan was “upside-down,” and has no further liability for payments.
And the buyer has purchased a house at a bargain price, hopefully planning to rehab the property and restore it to neighborhood standards and become a functioning part of the community.
Questions or comments?
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