Frustration mounts on all sides. The desperate homeowner wants to sell a home and dump a mortgage he can’t afford. The lender wants out with its skin on. The buyer and her agent want to proceed as soon as possible (and they want a good deal to compensate them for the hassle of entering the transaction). And yet the deal doesn’t get done, the home goes into foreclosure, and everyone is disappointed (and a little poorer). Why can’t short sales work even when they are clearly in everyone’s best interest?
One problem is the number of parties involved. To unload your home in a short sale, you have of course the primary lender to placate. But you can also involve a second mortgage holder, a mortgage insurance company, a title company, a secondary investor (like Fannie Mae or Freddie Mac), or a government agency like HUD. And every one of these parties is likely to be swamped with inquiries and understaffed to deal with them.
So first everyone needs a chance to look at and approve the deal. And there are conflicts of interest to deal with–for example, a first lienholder who will be repaid in full will be more enthusiastic about a short sale than the second lienholder or mortgage insurer who will end up writing off the deficiency.
Then, there is the amount of information needed, and the scrutiny required. Lenders won’t consider a short sale for borrowers who are making their payments successfully; those 90-120 days in arrears are likely to get their attention first. Ditto for homeowners with assets who could bring in the difference when their home is sold. Much of the initial approval process is devoted to making sure that a short sale is the lender’s best chance for minimizing loss. The advantage for the lender is in reduced costs–no attorney fees, no having to put the property on its books, maintain it, and arrange for its sale. But short sales aren’t the first resort when there is a chance of collecting the full amount from the borrower.
Then, there is the issue of mortgage insurance. In some cases, the mortgage insurer has to approve the short sale–one more group to check out the offer, verify the homeowner’s hardship, and negotiate a better deal for itself. And sometimes, the obstacle is the primary lender–if it can get more by foreclosing and collecting mortgage insurance proceeds than by allowing a short sale, you won’t get your short sale. And if you are a borrower relying on a short sale to save you from foreclosure, and the deal doesn’t close, you could be really stuck–trashed credit, evicted, and perhaps a deficiency judgment against you.
So a short sale isn’t the great solution it’s cracked up to be. Even the ones that fly through smoothly take at least 120 days. So how can you, as a borrower / seller or as a potential buyer move the proceses along more quickly? That’s the topic for the rest of the week. Feel free to add your questions any time.
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