Short Sales - Hope for Homeowners facing Foreclosure
October 17, 2008 – As the effects of the credit crisis unfold, including interest rate adjustments on existing mortgages, falling property values, increasing unemployment and tight credit conditions, mortgage defaults are on the rise nationwide.
Some mortgage defaults are the result of temporary conditions, and can be cured when the property owner becomes current on their mortgage payments. In other cases, the default may be a result of conditions that cannot be easily cured, such as interest rate adjustments, job loss, health issues, or other personal financial hardship.
In the case where the market value of the property is sufficiently greater than the amount owed, the property owner can sell the property, pay off the loan(s) and move on with their life. In some cases, a hardship that prevents a property owner from staying current on their mortgage can come at a time when the market value of the property is less than the amount owed. This is what is called "negative equity" or being "underwater". When these property owners are unable to become current again, they may be faced with some difficult choices.
After a homeowner misses 2 payments, the bank servicing the mortgage will generally issue a Notice of Default, or NOD. The NOD will give the homeowner another 3 months to become current on the note. If the loan is not brought current within this time, a Notice of Trustee’s Sale will be issued, scheduling the Trustee’s Sale for not less than 21 days after the date of the Notice. So from the day the first payment is missed, a minimum of 5 months plus 21 days must pass before the home can be foreclosed upon.
There are a limited number of ways to avoid an impending foreclosure with an underwater property, yet only one in which the services of a Realtor® can play a significant part. This is the Short Sale or Short Pay sales transaction, in which the distressed homeowner and their Realtor® negotiate with the lending institution(s) to accept less than what is owed and successfully complete a sale at market value.
In cases where there is only a first mortgage, or when the first and second mortgages are held or serviced by the same institution, the chances of avoiding foreclosure are greatly increased. There are some cases where different institutions hold the first and second mortgage in which a solution is possible. The majority of cases with more than one loan on the property, however, will not be resolved by a Short Sale.
Two possible alternatives to foreclosure that do not involve a Short Sale are:
- Mortgage Modification, where the lender(s) may agree to restructure the note(s) by reducing the interest rate and/or the amount owed, thereby reducing the monthly payment. These are often heard of yet rarely accomplished, as most homeowners in default still cannot afford to pay a reasonably reduced payment.
- Bankruptcy, which is sometimes the only way out for a distressed homeowner. In this case, any foreclosure action is stayed until the bankruptcy filing is finalized and the property is released by the court.
We have established that most potential candidates for a Short Sale will be unable to compete one unless the financing structure on the property is fairly simple. As the credit crisis unfolds and banks and lending institutions face increasing defaults, it is likely that they will become more willing to negotiate a Short Sale and thus avoid acquiring more foreclosed homes.
At this time, the Short Sale is probably the toughest piece of business out there for Realtors®, yet it is also one of the keys to getting through this market cycle for both homeowners and banks. In order to conduct successful Short Sales, the Realtor® must understand the process and also be able to make an initial determination that the chances of success are reasonably good, in order to avoid wasting precious time.
Mortgage modifications can help a qualified homeowner move through a difficult time if they are able to keep up with a smaller monthly payment. A bankruptcy filing can delay the foreclosure process for a time, but does not prevent it, and there are credit and tax consequences for the homeowner.
In some cases where a mortgage modification is not possible and the market value of the property is not too far below the amount owed, a Short Sale can be negotiated with the lender(s) that hold the note(s). A Short Sale generally has less serious credit and tax consequences for the homeowner, and under certain conditions, no tax consequences at all.
The basic steps in the Short Sale process are as follows:
- Qualify the mortgage structure to determine if there is a reasonable probability of successfully concluding a short sale. Simple mortgage structures (a single loan) have the highest probability.
- Qualify the homeowner to determine if there is a legitimate financial hardship that cannot be resolved in any other way. Document the hardship thoroughly and prepare a complete file.
- Price the property aggressively and obtain an offer. Negotiate if necessary to form a purchase agreement.
- Submit the spotless file and the ratified purchase agreement to the lender.
- Now the hard work starts…
- The negotiations with the lender can take several weeks, or more if the file is incomplete or inaccurate, sometimes causing the buyer to back out if it drags on for too long.
- Often, it is wise to work with a third party facilitator that has expertise and connections in the lending industry. This can greatly speed the process and increase the chances of success. These companies are compensated with a share of the total commissions on the transaction, so there is no additional cost to the homeowner or the lender. They really earn their pay and we are happy to have them on the team.
If you are a homeowner facing possible foreclosure and have exhausted the possibility of a mortgage modification and either do not qualify for a bankruptcy or wisely wish to avoid one, the Short Sale can be a viable and less financially damaging alternative.
It is one of the toughest jobs out there for Realtors® and few have the stomach or the professional tools to get them done effectively. If you think you might qualify and would benefit from this approach to resolving your financial challenges, please don’t hesitate to contact me at 530 274-0906 or Paul@PaulSieving.com for a discussion of your situation.
Homeowners facing foreclosure should always seek the advice of an accountant and an attorney who specialize in counseling people facing financial difficulties.
Paul Sieving is a Realtor® with CENTURY 21 Gold Dust Realty in Grass Valley, a Director and member of the Finance Committee of NCAOR and a former Board President (2004) of the Grass Valley Chamber of Commerce. Comments, questions and thoughts are welcome at
Paul@PaulSieving.com or (530) 274-0906.