Are you wondering why it takes so long to get short sales approved? The real reasons may be very different from what you might believe.
It would seem when prices are down and millions of homeowners owe more than their home is worth that it is in everyone’s best interest to approve a short sale. All the more so when Mortgage Bankers Association statistics show that a foreclosure costs the lender 30 percent more than a short sale.
As any agent or consumer who has tried to close a short sale offer will tell you, closing a short sale is usually a very long and complex process.
In July of last year, a Washington Post article stated that Bank of America was going to streamline its short-sale process so that it would only take seven days to obtain a short-sale loan approval.
Judging from the numerous blog posts from both consumers and agents, this has yet to occur in a large portion of the short-sale market. To be fair, any lender could complete the approval process in seven days, but the delays often result from other parties in the transaction.
One of the biggest issues in closing short sales is secondary financing. If the holder of the first mortgage is going to have to take a loss, it usually is reluctant to give any type of payoff to another lender who is in second position.
The holder (or holders) of the secondary financing can refuse to cooperate unless it receives part of the sale proceeds.
A common request that many secondary lenders seem to be making is for 10 percent of their loan amount. If the loan goes to the loss recovery department, the request can be $5,000 plus 10 percent of the loan balance.
What’s messy here is that the holder of the first mortgage may have a cap on what it will allow to be paid to any secondary lien holders.
The challenge for agents and consumers is how to negotiate through this complicated maze. If there is secondary financing on the property, one strategy is to approach the second mortgage holder first to see what its requirements are in terms of payoff.
You must also know what the first mortgage holder will require. Most lenders have specific guidelines about how big of a reduction they are willing to take, as well as how much can be paid to other lien holders.
Knowing this information ahead of time is critical if you want to avoid wasting your time on a transaction that won’t ever close.
An additional twist in this scenario is that many first and second mortgage holders are now checking the homeowner’s credit. If the homeowner is keeping up other payments and is applying for a short sale, the lender may not agree to the short sale unless the homeowner is willing to sign a promissory note for the shortfall.
Otherwise, the lender may choose to foreclose, which could force the borrower into bankruptcy.
Complicating issues even further, many borrowers who placed less than 20 percent down on their property have private mortgage insurance (PMI).
Here’s an example of PMI: Assume that a borrower is putting 10 percent down and obtaining a 90 percent loan. The lenders normally would require a 20 percent downpayment and would give an 80 percent new loan. PMI insures the 10 percent "difference" between the borrower’s down payment and what would have been an 80 percent loan amount.
What seems to be a common source of frustration for both agents and consumers is that the PMI companies have joined the lender in asking homeowners to sign a promissory note for the shortfall amount.
PMI companies are insurance companies. Like other insurance companies, it’s simply good business for PMI companies to limit their losses and payout. If the consumer will agree to the promissory note, then that reduces the PMI company’s losses, which looks better on its balance sheet.
On the other hand, if the PMI company agrees to the short sale, it has to make an immediate payout on the lender’s claim. By refusing to approve the short sale, the PMI company forces the lender to foreclose on the property.
The foreclosure process can take months to complete, and then even more time before the property sells and closes as a bank-owned property (also known as real estate-owned or REO). The net effect for the PMI company is that it puts off paying its claim for 12-24 months.
Also, if the market improves, the lender’s claim may actually be less one to two years from now than it is today.
Here’s the final zinger, however.
Suppose that a property has declined in value by 20 percent, completely wiping out the holder of a 10 percent second mortgage. The holder of the first mortgage offers the holder of the second a 5 percent payout to close the transaction.
The second trust deed holder says "No," because if they file a claim for mortgage insurance they get the full 10 percent. Thus, a number of major lenders who have made equity loans may have an additional incentive not to agree to a short sale.
This may explain why so many holders of secondary financing are unwilling to agree to a short sale and prefer a foreclosure instead.
To be fair, there are many reputable lenders and companies that are doing everything they can to help consumers. Sadly, as an agent or a consumer, you have no way of knowing what the various requirements will be with the lenders you are working with on your short sale.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
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