Fannie & Freddie Say 30 Days for Short Sale Review, 60 Days Maximum for Raleigh, Durham, Cary & Wake Forest North Carolina
The only thing short about a short sale is the payment on the existing mortgage. The time for review is way too long. To correct this problem, Fannie Mae and Freddie Mac issued new guidelines to their servicers. See http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1209.pdf for Bulletin 2012-9 by Freddie Mac. Similarly, see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2012/svc1207.pdf for Servicing Guide Announcement SVC 2012-07
The servicer is supposed to respond to the submission of a short sale package within 3 business days. From the time a complete package is submitted, including a proposed North Carolina Offer to Purchase and Contract and Short Sale Addendum, the servicer is supposed to respond to the proposed short sale within 30 days. If the servicer does not approve or disapprove the short sale within that time limit, the servicer is required to give the borrower a weekly report until there is a decision. The regulations say the decision must be made within a masimum of 60 days.
Are all the servicers in compliance with this requirement? Are you kidding? The last one I talked to on a Freddie Mac loan for a Raleigh Short Sale listing laughed when I pointed out this regulation, then said it would take 90 to 120 days.
Other programs like Home Affordable Foreclosure Alternative (HAFA) specify that the servicer is supposed to respond the the short sale offer within 30 days if you have a HAFA approved short sale in process. Watch this video for a better understanding http://www.youtube.com/watch?v=qFH6tpdAZXI
Once the servicers get into compliance with these requirements, short sales will become much more acceptable to buyers. The number of buyers who will wait 30 days for an answer is much higher than the number of buyers who will wait 6 months. Any suggestions on how to get wider compliance with these rules?
If you own property in NC or are in the Research Triangle area and perhaps may need to Short Sale your home or business, please call or email Tim to request a confidential appointment regarding your specific requirements to Short Sale real estate in Raleigh, Durham, Cary, Wake Forest or other surrounding Research Triangle area towns in North Carolina.
Short Sales Will be Streamlined and Encouraged by the Treasury
On May 14th, 2009, the Making Home Affordable program created by the Obama administration was expanded by the Treasury Department to provide incentives for homeowners and lenders to engage in short sales. The program also encourages deeds in lieu of foreclosure. The Treasury Department unveiled this plan by calling these provisions Foreclosure Alternatives in the Making Home Affordable program.
To begin the process the lender evaluates the sellers to see if they qualify for the program, because the borrowers/sellers must meet the requirements of the Home Affordable Modification program. In other words, the borrowers who want to be sellers must meet the same standards applied to borrowers who are looking for loan modifications under the Making Home Affordable program, but are unable or unwilling to go through with the loan modification. Also, the lender will evaluate the property to see if it is reasonable that a sale will produce enough money to allow the lender to approve the short sale, i.e. will the net proceeds of a sale at the estimated sales price be an amount the lender would accept. A related step that the lender must take at the beginning of the process is to see if the condition of the title makes it plausible that all of the other loans and debts secured by the property will be able to be satisfied by a short sale. If the sale will produce enough money to satisfy the first loan, but not enough to take care of the second, third or fourth liens, then the property is not a good candidate for this program.
Sellers who complete a short sale can receive up to $1,500 when the sale closes. In nearly all short sales, the sellers get nothing out of the sale. With this program, they can use this money to pay some of their moving expenses when they finish the short sale. This helps the recurring problem that sellers need funds to be able to relocate when the home sells. This same $1,500 incentive payment applies to borrowers who give their lender a deed in lieu of foreclosure.
Loans have servicers and investors. The servicer collects the monthly payment and otherwise deals with the administration of the loan. The investor owns the loan and gets the net proceeds of each payment, after the servicer gets paid for its work. The servicer can get up to $1,000 for completing a short sale or accepting a deed in lieu of foreclosure. This is a decent incentive when you consider that the servicer gets a few cents from collecting each monthly payment.
In addition to these incentives, this expansion of the Making Home Affordable program creates a standard process to follow in a short sale. It creates timelines for the performance of the short sale, which is a welcome addition as they frequently drag on and on. The program also creates standard documents for use in short sales and deeds in lieu of foreclosure. The standard documents will include a Short Sale Agreement and an Offer Acceptance Letter. This standardization will make short sales easier to do, and the performance timelines should speed up the process. The Treasury update issued to explain this program says the Short Sale Agreement will “establish clear time frames for performance.” I hope this means there will be clear time limits for a response from the lender to a proposed short sale contract. If so, this could greatly encourage buyers to purchase short sale properties. A quicker decision by the lender will make it easier for the buyer to wait for the short sale to close, as some short sale buyers get frustrated with the process and buy another property.
The lender has to allow the sellers/borrowers a minimum of 90 days and a maximum of a year to sell their property. The time will vary depending on local market conditions. The property to be sold must be listed with a real estate agent that has experience in selling properties in the neighborhood. So, it would be wise for more real estate agents to take short sale training classes.
The seller and the lender will spell out “reasonable and customary real estate commissions and selling costs” in the Short Sale Agreement according to the guidelines for this program. These selling costs and commissions will be paid at closing from the proceeds of the sale. One of the best parts of the entire initiative is that once an offer is received the lender cannot try to negotiate a lower commission to be paid to the real estate agents. In other words, the Short Sale Agreement establishes the rate of the commission and the lender cannot try to cut it during the negotiations on the Offer to Purchase in the short sale. This will encourage more real estate agents to do short sales.
The lender will establish both the property value and the minimum amount that the lender will accept. So, the lender will order an appraisal or a Broker Price Opinion (BPO) and use that to establish a reasonable sales price for the property. By the way, the appraisal or BPO will have to be current, as the program requires that they be done within 120 days of the Short Sale Agreement. This appraised value will be the basis for the lender’s decision of how much they will accept as the short payment of the balance due on the loan. Many lenders will accept 80% to 90% of the value established by the appraisal or BPO, which allows buyers to purchase the property at a favorable price.
This procedure of establishing the acceptable value of an offer will be a wonderful improvement to a short sale, as the seller will get this information at the beginning of the marketing effort. In short, the seller will know what offers will be acceptable to the lender. This should eliminate the “guess again” feature found in some current short sales, where the lender will occasionally turn down an offer without giving a counter offer or any guidance to the seller. The opposite should happen under the current program, i.e. the lender will instruct the seller concerning the price at which the property should be listed and also provide guidance on price reductions.
One of the biggest problems in short sales comes when the property has a first loan and additional junior liens. For example, many homes have a first loan and a home equity line of credit that is a second loan. There is some assistance from this program because the Treasury will contribute money to help pay off second loans and other junior liens. For every two dollars that the lender allows to be paid to the junior lien holder, the Treasury will put in an additional dollar, up to a limit of $1,000 from the Treasury. Since many lenders in first position will only allow a junior lien holder to get $3,000, this program should make it easier to pay off junior liens.
If the borrower is unable to sell the home within the time specified in the Short Sale Agreement, the lender may consider a deed in lieu of foreclosure, in which the borrower voluntarily transfers ownership of the property to the lender. However a deed in lieu of foreclosure only works if there is only one loan on the property because the lender will not want to accept the property burdened by the obligation to pay off the junior loans.
If you want to read all the details, the entire Treasury Update: Foreclosure Alternatives and Home Price Decline Protection Incentives is found at http://tinyurl.com/qlbn9m. or http://www.treas.gov/press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf
This program will be available until 2012. Let?s hope we are done with short sales long before that.
Unfortunately, there are people who will try to take advantage of other people’s misery in a real estate short sale. I get emails daily by “coaches” who want to sell me a program of how to short sale a home in order to make money off shorts sales in a manner that I find distasteful. This is not the kind of Realtor training that I want to be involved in.
The schemes have two basic approaches for the property for sale, one by using an option to purchase and another using a trust. Basically, they start by teaching their students to find people in trouble with houses for sale, then put those people in even more trouble. I do not think it is right to do that to one of my neighbors in Raleigh, or anywhere in North Carolina.
The student is supposed to approach someone selling a home who needs to short sale their home and tie up the property using an option or a trust agreement. In other words, the student looks for a MLS listing that should sell for $200,000 and makes an offer of $160,000 to a family that is desperate to sell. Using the option, the student pays as little as one dollar to have the option to purchase the home, and gets the owner to sign the contract. Remember, this is an option to purchase, not a promise to purchase for a traditional sale.
The student submits a short sale package to the lender, saying that they are paying a reasonable price. At the same time, the student puts the home back on the market, tries selling the home for $200,000 or more. If the student can get the mortgage loss mitigation department to take a short payment based on the price of $160,000 and if the student can find another buyer to pay $200,000, then the student exercises the option, buys the property and immediately resells it for a profit. In short, the holder of the mortgage does not get the payoff it deserves, the property owner does not get to the equity they deserve, and the student takes the money that should be paid on the home mortgage. In stead of loss mitigation, this is loss maximization for the lenders who make mortgage loans.
So, what is wrong with that? If all the other parties are willing to let the student take advantage of them, why shouldn’t the student profit?
Lets analyze a completed sale first. The student is telling the holder of the home loan that they are paying off as much as possible of the loan on the home. Also, the student may be leaving the people with homes for sale with the obligation to pay the balance of the money that is not paid on the home mortgage. The owner of the home may also have an obligation to pay income tax on the amount that the payment to the bank is “short”.
After the sale closes, there will be some mortgage lender that will take a simple look at the tax records and see that the home sold for much more than the lender saw on the HUD-1 or closing statement. Then, the mortgage lender will get its lawyers to work to recover the ill gotten gains, as well as any other damages they can claim. The government prosecutors may get involved to teach the student what happens when you mislead institutions that make home loans.
Next, let’s analyze sales that do not close. In today’s market, a well priced home sells, an overpriced home does not sell. When the student raises the price to try to make a profit, the chance that the home will sell decreases dramatically. The family that owns the home is expecting a normal home buying experience, possibly hoping to stop foreclosure when the student buys the home. That family gets an education on the difference between an option and a sales promise when the property does not sell. When the student does not get another buyer to pay an inflated price, the student leaves the option money behind and does not buy the home. In many of these schemes, the option money is one dollar. So, the family does not get to stop foreclosure, they get to endure a foreclosure sale, and have one dollar for all the heartache they went through. Also, America gets more foreclosure homes.
I have a hard time with teachers who tell students to find people who are begging for a life preserver to keep them afloat. Then, they teach the student to throw them an anchor that is disguised as a life preserver that will drag them under. These teachers have stories about a few of their students who have made large amounts of money taking advantage of uneducated sellers and mortgage lenders that are so desperate for cash that they will approve a low short sale. This is not how you do a real estate short sale, this is how your increase your chance of a foreclosure. We should provide Realtor training to prevent foreclosures.
When someone approaches you with a scheme like this, just remember “thou shalt not steal.”
Most of this website talks about negotiating in one form or another, but here are some key points.
If you are trying to avoid foreclosure, you need an offer fast. Negotiate with the Realtors through the MLS by putting something like “submit all offers, we do not care about the selling price” in the MLS listing. You will probably get “less than wonderful” prices, but you will have an offer to submit. This is particularly important with those lenders who will not let you talk to the loss mitigation department until you have an offer. With the offer, you can negotiate to keep the file in the loss mitigation department and avoid foreclosure. One of the great ironies of this process is that when the lender puts the pressure of foreclosure on you to get you motivated to sell the home, the lender almost always gets less for the home.
Negotiate the price with the agent doing the Broker’s Price Opinion (BPO) for the lender that is considering the short pay. Use the independent authority of comparable sales and the preparation of pictures of defects and bids for repairs to keep the price in line with reality. Most of the time you will have no contact whatsoever with the BPO agent, so do this negotiating with the loss mitigation negotiator, by furnishing the same pictures and bids.
Negotiate the time for review and the postponement of the foreclosure by using every form of persuasion possible. I have even called the Western Regional Director of the Office of Thrift Supervision to put pressure on Washington Mutual when they were under supervision by OTS so that I could avoid a foreclosure. If you are not getting what you need, go to an authority who can get it for you, like the investor who owns the loan, the guarantor (mortgage insurer) or a supervisor in the department. Just remember, when you do that, your pleasant relationship with the loss mitigation negotiator just ended, so only do that when you can afford to make her mad.
Most of negotiating success in short sales comes from preparation. That is why it is so important to have a complete Short Sale Package, with persuasive materials about the problems with the real estate market and the problems with the house. If you can convince the lender that they never want to own this house, the negotiations on the short sale go better. Mold, toxic waste, dangerous conditions and illegal structures are your best friends in negotiating to avoid foreclosure.
After you get a response from the loss mitigation negotiator assigned to your short sale, realize it is not that person’s decision. Don’t yell at them, they are the messenger. Also, you will need their recommendation as the negotiations continue. If the lender wants more money, present it positively to the buyer, with the benefit that the buyer has the power to eliminate the biggest problem with the short sale i.e. if the buyer accepts this offer, the approval process for the lender is over and the buyer wins by getting the home they want.
If the buyer wants to give a counter offer to the lender’s counter offer, present it with some comparable values that support that price. The BPO price may be getting out of date, so if you have more current sales and homes that just went on the market, that will give the negotiator ammunition to persuade the investor or decision maker.
Part of a Realtor’s education in negotiation is that once you get an acceptance from the lender, do a “nibble”, a negotiating technique that gets you the one last part of the deal that you need. Say, with confidence, “Of course that includes a full release of the obligation for the seller.” One of the biggest benefits of a short sale is to get the entire debt off the seller’s back, so get a full release. Some people who provide Realtor training call this without recourse, which is adequate, but the real term you want is to be fully released from the balance of the debt.
If you do not get an approval from the lender that the buyer will accept, you still have accomplished getting a short sale file open and established a method of communication with the negotiator. See if you can persuade the negotiator to keep the file open so that you can directly submit another offer to her. This will dramatically shorten the time for a second review of the short sale.
Even if you did not get a deal accepted by the buyer, hopefully you have a price from the lender that they will accept in another short sale. Some lenders just give you a denial with no price, which is a ridiculous way to negotiate. If the price was so low that it did not merit a response, the whole short sale review process should not have started. After all the review work, get a price and try to put the short sale together. Getting an acceptable price greatly helps your negotiating with future buyers. Tell them they can get the benefit of a short review time and decrease the chance that another buyer will come along if they will just equal the price the lender wants. In other words, they win on the big issue of getting the lenders approval. Also, you can adjust the listing price accordingly, so you can get more showings and hopefully more offers.
Negotiating an “as is” sale is difficult in a short sale. Most buyer’s agents cannot handle that term. They get the buyer excited about all the horrible problems that the house could have, and wonder why you brought it up if there is not some horrendous problem. Some agents even ask if “as is” means they cannot do an inspection. Assure them you want them to do an inspection so the buyer knows the condition of the house. But, the seller has no money to fix anything in a short sale. The lender is already getting a short payment, so the lender does not want to pay to “upgrade” the house.
In most short sales, you can accomplish “as is” using gradual persuasion. A tug boat cannot move a supertanker in one huge push. It does it with slow, gradual nudges. Tell the buyers agent that the lender will probably insist on an “as is” sale, but you will see what you can do. This gets the buyer startiing to accept this term, but without the image that the seller has no confidence in the quality of the house. When the lender comes back with the requirement that it gets exactly the amount shown on the closing statement (HUD-1), you indicate that there are three choices. The buyer can take the house “as is” after doing an inspection. The buyer can pay more for the house to get the repairs paid for on the closing statement, because the seller has no money. Or, the buyer’s agent can kick in the money for the repairs. When the buyer’s agent and the buyer have three choices, no one is forcing them to take the property “as is.” They just select that choice as the best one for them in the short sale.
If you get multiple offers on a short sale, a smart buyer’s agent will put the “as is” term in their offer to make it more acceptable to the lender. The buyer’s agent will know that the mortgage lender wants to deal with an agent who knows how to close the sale, and who will not “nickle and dime” them after the contract is approved for a short pay. I have seen offers that are less money get accepted by banks because they have better terms, although it is usually because the buyer is paying all cash for the short sale home. So, if you represent a buyer, make the terms of the contract as easy as possible for the lender to approve.
If you want to pick up all the tools of real estate negotiating, look for my book Create A Great Deal, the Art of Real Estate Negotiating. It will help you in ever part of real estate, but especially in short sales.
Some short sale sellers will make your life extremely “interesting” with their talent for putting on multiple mortgages and collecting liens. You get to negotiate them all, because if any one will not sign off, the short sale does not close. As the picture shows, you have to get every lender to jump into the deal.
This is why some Realtors will not take short sales with too many mortgages and liens. Some short sales do not close, and ones with multiple liens are the hardest to close. Once you have done some short sales, you will understand why. Refer the short sales you do not want to another Realtor who is willing to deal with the mess. A separate post discusses the priority of liens and their effect on how much to offer each lien holder in Lien Priority Determines Who Gets Paid & How Much
The first issue is how do you negotiate with all the liens. Some of the people providing Realtor training say to negotiate with the last one first . In other words, if you have a first loan and a second loan, find out what the second loan will settle for first, then negotiate with the first loan. There may be some merit to that, because you know what you have left to offer the first loan as a short pay.
I do short sales differently because I negotiate all of the debts at once. The reason is that there is not a linear relationship between them. In other words, the results of each negotiation is interdependent on the results of all the other negotiations, so you need all the answers all the time. If the property is in foreclosure, you do not have enough time to submit the package to the second lender, wait for their review and approval, then submit it to the first lender. I had a property in foreclosure in Palos Verdes, California with a first and second loan with Washington Mutual and a third with CitiBank. Citibank gave us an approval on the third loan one day before the deadline set for the foreclosure on the first loan. If I had waited to get that short pay approval first, then submitted to the other lenders, the sale would not have gone through.
To understand the interdependence, some lenders on a short sale home have guidelines for how much they will let a junior lienholder be paid. I am working on a short sale in Rancho Palos Verdes, Calfironia where the first loan is with Countrywide and the second loan, a line of credit, is with Bank of America. The seller cannot pay the mortgage. Countrywide will not allow the second lender to be paid more than $3,000 on the closing statement (HUD-1). Bank of America will not settle for less than $5,200, because they have a rule that they will not take a short sale that does not pay them at least 10% of the outstanding balance of the loan. The entertaining part of this standoff is that Bank of America is merging with Countrywide, so it is like a one member of a couple saying you have to put all the money in my right pocket, then the other member of the couple saying no don’t do that, put money in my left pocket.
How do you break this standoff? You have to know what is allowed under your local rules, the disclosure rules for lenders and the National Association of Realtors code of ethics. In California, the commission is paid by separate commission instructions to the escrow officer that are not part of the escrow instructions signed by the parties. You can consider having one of the Realtors send the amount of the difference to the junior lender. You can also have the buyer buy something from the junior lender that happens to equal the amount of the difference. You cannot do anything that is beyond the rules for proper presentation of information to a lender i.e. do not lie to a lender. See the post Don?t Put Your Client In Jail for more discussion, and substitute Yourself for Your Client.
If you watch a good chef, you will be amazed at how many things can be prepared at once with all of them finishing at the same moment. When you get good at short sales, you can handle many liens at once and get them to a closing at the same time, and be able to avoid foreclosure at the same time.
Goldilocks found that one item was too hot, another was too cold, and one was just right. The pricing a short sale listing needs to follow the Goldilocks principle, not too high, not too low, but just right.
If you price the house too high, you will not get showings and offers. To get the short sale process started, you normally have to present an offer to the lender. There are some lenders who will pre-approve the seller’s qualification for a short sale, but that is in the minority. So, you need to price well to get an offer.
You might have to ignore this rule briefly, depending on the lender you are working with. Some lenders want to see that you tried to get them fully paid. In other words, they want to see that the listing price started at a figure that would give enough money to fully pay the lender. If the market tells them there is no way to get that amount after you tried, they are more satisfied that it is the market, and not the Realtor, who is forcing them into a short sale situation. If you have to do this, leave the price high for a while, then drop it. How long is a while? That depends on whether you are facing foreclosure or not. If not, a while is a couple of weeks. If foreclosure is looming, you might want to skip this altogether, or price it high for a few days.
Why not price too low? You want to get an offer to start the short sale process, but if the offer is outrageously low the lender will not even open a file to review it. Also, if you do not generate an offer that is close enough to the market value for the lender to accept, you will not get the lender approval so you will not close the sale. Generally, most lenders will take 90% of the market value from a Broker Price Opinion (BPO) or an appraisal, although some will go as low as 80%. In some markets, the buyer’s agents will not bring you offers above the asking price. So, your low price generates offers that are too low and you do not close.
What is just right? You want to stand out below the price of the other homes for sale, because you will have to give the buyer an incentive to go through all the difficulties of a short sale. What it takes to stand out depends on your market. In Raleigh, a 5% discount is enough to get the buyer’s attention. In other markets, it may take more or less, depending on the inventory of homes for sale.
There is an exception to the Goldilocks rule. If you are facing foreclosure, do whatever it takes on the price to get an offer. Some lenders will not proceed with a foreclosure if they see that the home is being aggressively marketed and they will keep the property in the loss mitigation department. But, once your file is transferred to the foreclosure department, the lender goes full speed ahead to foreclose. The foreclosure department’s mission is to either get the loan fully reinstated, or to sell the property on the couthouse steps. The only thing that will stop the run away train heading toward foreclosure is an offer.
On one property in Raleigh, I was trying to sell it around $450,000. When the foreclosure notice came out, we dropped the price to $425,000 and got more showings but no offers. So, we dropped it to $400,000 and got multiple offers that bid the price back up to $420,000. If you want to see how to get multiple offers to bid up the price, go to www.CreateAGreatDeal.com. Without an offer, the home would have been foreclosed.
Which side to your err on? Go toward the low side in pricing instead of the high side. It is better to have offers to submit, and get a counter offer from the lender, then try to get the buyer to accept the lender’s counter offer than to have no offers at all. One monkey wrench in this plan is the occasional lender that will just turn down your offer without a counter offer, leaving you with nothing to present to the buyer. Luckily lenders are getting smarter in short sales, so they are doing this less.
The relationship between Realtors and Lawyers is interesting. Lawyers do not want Realtors intruding on their turf. When a foreclosure proceeding is filed, it may be considered a lawsuit depending on the foreclosure procedures in your state. Many foreclosures are done by a power of sale in the deed of trust, so it is just a series of notices and other requirements leading to a non-judicial foreclosure. In other words, it is not a court proceeding. However, in many states a foreclosure is a filing with the court, so it can be considered a legal proceeding or lawsuit.
In North Carolina, the Short Sale Addendum to the Listing Agreement says “If a foreclosure or other judicial proceeding is filed with respect to the Property, although Firm may continue to solicit and negotiate offers to purchase and contact, communicate with, obtain information from and supply information to Lienholders, Firm may no longer negotiate the terms and conditions of a Short Sale with Lienholders, as such negotation would constitute the practice of law.” This did not come from a determination by the North Carolina State Bar, as they have no official opinion issued on this issue. What that means to you is that the bar association has not agreed on where the line is between the practice of real estate and the practice of law. This wording came from the North Carolina Association of Realtors. I talked to an attorney at the North Carolina Real Estate Commission who felt it would take an extreme situation of negotiating with a lender for the Realtor’s activity to be ruled to be the unauthorized practice of law, as he felt that presenting an offer to a lender and encouraging the lender to take the short sale is a permissable activity for a Realtor.
Other states have similar interpretations of the line between what a Realtor can do and the practice of law. For example, click on this determination by the Florida Bar’s Standing Committee on the Unauthorized Practice of Law.
Luck for me, I am an attorney. How about you?
If you are not licenced as a lawyer in the state where the property is located and where the client lives, you need to know about the rulings that may restrict what you do in negotiations when a foreclosure has been filed. For states like California, where nearly all the foreclosures are non-judicial in nature, the line may be drawn in one location. For states like North Carolina, where the foreclosures involve a court filing, the line may be in a different location.
One other pitfall to avoid is the regulations on debt counseling. If you charge the seller a fee that is not contingent on the closing of the sale, it can be argued that you are doing debt counseling. So, do not charge any up front fees, just collect commissions if the sale closes.
How do you stay out of trouble? Follow the wording in your forms. For example, in North Carolina, you contact, communicate with, obtain information from and supply information to the lender. You do not use words like negotiate or advocate in any correspondence. Be sure to phrase everything, particularly everything in writing, in terms of contacting, communicating, obtaining and supplying information. You are just communicating, you are not advocating.
How do you find the line? Talk to your broker in charge. You may also want to talk to an attorney, particularly if your firm has one on retainer. Just know where the line is so that you will not have problems. Some of your communication with a lien holder that are in writing might be lasting proof that you are engaged in the unauthorized practice of law, so stay away from the line.
There are people who say that a short sale does not have a derogatory effect on your credit. I disagree. I have minimized the effect for some of my clients and on rare occasions convinced the bank to report the sale as “paid as agreed”. That is extremely rare. Normally, a short sale is reported as “paid for less than full value”. That is a substantial ding on the seller’s credit.
My friend George Durkin from Las Vegas is a great student of short sales. He sent me an article from About.com that argues that a short sale is not much different than a foreclosure as far as a future lender is concerned, because both show that the borrower did not pay the loan fully. It argues that the next banker will look at the short sale on the credit report and say “that the defaulting homeowner is someone who, when the chips are down, didn’t honor a contract.” I disagree with that also, and I think George does too, but he knows I want to read everthing on short sales.
While the effect of a short sale on a credit report is not good, it is not as bad as some of the other choices. The simplest proof is to look at the Fannie Mae guidelines for loans. The guidelines state that the “seasoning” on a foreclosure is at least 5 years, the “seasoning” on a deed in lieu of foreclosure is 4 years, while the “seasoning” on a short sale is 2 years. In other words, it will take five years if you are lucky after a foreclosure to qualify for top quality financing, four years after a deed in lieu of foreclosure to the the best loans, while it takes two years to get back into good graces after a short sale. There are some restrictions that apply to people with foreclosures that extend from the fifth year after the sale to seven years after the sale, such as Fannie Mae will not finance a second home during that period. There are no such restrictions to people who have done a short sale.
Secondly, on a loan application the borrower will have to answer the questions in the Declarations Section VIII “have you had property foreclosed upon or given title or a deed in lieu thereof within the last 7 years? (y/n)” The next question is “have you directly or indirectly been obligated on any loan which resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment? (y/n)” If you have had a foreclosure or given a deed in lieu of foreclosure, you answer yes. If you have had a short sale, you answer no.
Some commentators state that a foreclosure will cause a 250 point decline in your FICO score while a short sale will cause a 100 point decrease in the FICO score. I do not believe you can measure it that precisely, as credit reports have many factors that are considered simultaneously. Others say the range is from a 50 point decline on the low side to a 350 point decline on the high side, depending on what your score was before the short sale. The short sale will drop of the credit scoring system after 7 years, which is normal for a derogatory item on a credit report.
On one hand some lenders argue that there is no credit preservation advantage of a short sale, and on the other hand there are those short sale commnetators who say a short sale has no effect on your credit. Both extremes are not supported by the facts. Like most other things in life, reality is somewhere in the middle: there will be credit damage from a short sale, but it is better than the alternatives.
The first place you negotiate is with the loss mitigation department, and hopefully you get what you need. Sometimes, you run into problems, like having them turn down the short sale with no response. In other words, they just turn you down, but do not give you a counter offer to work with. This is particularly upsetting if you are facing a foreclosure. So, how do you stop the foreclosure?
It is extremely unlikely that the loan belongs to the lender you are dealing with. On average, banks keep only 15% of their loans. So, there is an 85% chance that they are only servicing the loan. When the payments are not being made, they have lost the servicing income and want to get it back to producing income for the bank either by reinstatement or foreclosure.
So, when you have a problem with the lender that is servicing the loan, go around them to the actual investor. The investor’s motivation is different from the servicer. Instead of looking at a lost income stream, the investor is trying to get as much principal back as possible.
If you can get in touch with the loss mitigation negotiator at the servicing bank, just ask who is the investor. They do not have to tell you, but if you establish some raport before you ask, they might. If they do not tell you, change the subject, talk about something else, then casually ask them what team they are on. The lenders divide their loss mitigation departments into teams based on who the investor is, so the team members only have to learn the rules of one investor. Once they tell you what team, you know the investor.
If you cannot get the information about the investor directly, play the odds. If the loan is within the limits of a conforming loan, it is most likely Freddie Mac or Fannie Mae. Start with Freddie Mac by going to www.FreddieMac.com, because there is only one loss mitigation department in Freddie Mac, in McLean Virginia. If Freddie does not have it, try Fannie Mae at www.FannieMae.com. They have five offices. The office that will regulate your lender is the one closest to its headquarters. So, figure out which one is the closest to the headquarters and call.
If it is a HUD or a private investor, they are much harder to find.
Once you get in touch with the investor, they may have more interest in accepting your short sale. They will need to get in touch with the servicing bank to postpone any foreclosure and discuss the acceptance or counter offer to your short sale proposal. In other words, it is not the end of the line if he servicing bank will not work with you. Try the guarantor, as we discuss elsewhere in this website or try the investor. The investors and guarantors may have a different reaction to your proposal.
There is a lot of aggravation amongst Realtors about getting to ?speak to the horse?s mouth? when handling offers on short sales. As long as events occur like my recent experience, the problems will continue.
Over the weekend, I received an offer on my short sale listing. The Sellers were already approved ?in principle? for short sale, and GMAC Mortgage had full authority to talk to me as the Realtor for the seller. However a couple of weeks ago, the sellers had been told that foreclosure proceedings had re-commenced.
First thing Monday, I called the Loss Mitigation helpline and found myself speaking to a young lady who didn?t seem to even comprehend the broad concept of ?Seller?s Realtor ? offer ? where do I send it? ? need to postpone foreclosure?. I asked to speak to a supervisor. The Supervisor was clearly a ?phone supervisor?, not someone who could speak knowledgably about the process. I was given a fax number to send the offer, but told that it would be several weeks before the offer would be ?analyzed?, and several weeks before they would consider stopping the foreclosure process. I asked to speak to a negotiator and was told that I couldn?t because I had to wait those several weeks until the offer had been analyzed. When I explained that several weeks would be too late to stop the foreclosure, the supervisor stated arrogantly ?then we will have to take that chance?.
In other words . . . the loss mitigation helpdesk did nothing to help the borrowers or GMAC Mortgage. A less experienced or determined Realtor may have given up at that point and told their seller that it was too late.
I faxed the offer complete with a lot of other information (full listing details and history, estimated net proceeds, CMA, commentary on the market, etc) and sat back and prayed. The next day, within 24 hours, I had a complete and comprehensive email giving me a contact name with full contact details, a confirmation that the foreclosure had been postponed, a statement that BPO?s had been ordered, and a clear timeline for the entire process. Excellent!! Exactly what I wanted. This renewed my confidence in GMAC Mortgage and the system.
The PROBLEM is that the Loss mitigation helpline did not reflect any of that. The original person who answered the phone had no clue, and the supervisor gave wrong and misleading information. THAT is where the problem is.
I appreciate that these helplines are swamped at the moment, but they have to develop a way of quickly and efficiently sifting out the genuine offer that needs action, from the ?general inquiry?, and quickly pass that call to a knowledgeable and experienced person who can fully explain what is required and what will happen, so that they can put Realtor?s and borrowers? minds at rest. GMAC Mortgage, are you listening?
Our thanks for this post that was added by Chris Laurence, a Realtor in Front Royal, Virginia (near Washington D.C.). To contact Chris go his website