Short Sales: A Fraying Lifeline for Homeowners

[Joseph Burkeson, CMI]

Out of the frying pan into the fire... I expect this turn of events coupled with the loss of the $8K tax credit to put a chill on home sales this fall & winter, what say you?


Short Sales: A Fraying Lifeline for Homeowners
Lenders are reining in short sales aimed at helping troubled mortgage borrowers

Troubled homeowners may be losing a major lifeline: so-called short sales. To get bad loans off their books and spur home sales, lenders have been forgiving the difference between the outstanding mortgage balance and the purchase price. Banks were never eager participants in short sales, and now financial firms—even those that can offload losses to the government—are balking at such transactions. Some lenders are forcing the sellers to pay extra money at closing. Others want a promissory note for part of the amount due.

The situation could be a setback for the already wobbly housing recovery. A record one-third of borrowers owe more on their mortgage than their properties are worth, notes research firm First American CoreLogic. The number of underwater homeowners will only continue to rise since values are still falling. And if distressed borrowers can't negotiate short sales, more may be forced into foreclosure, further depressing prices.

Since the housing bust, short sales have been a key part of the market. They accounted for 12% to 18% of national home sales over the course of this year. In such hard-hit areas as Miami and Phoenix, roughly a third of listings involve underwater mortgages, according to real estate brokerage ZipRealty.

Both sellers and lenders have seen short sales as a preferred option to foreclosure. The deals are less damaging to a borrower's credit. For banks they're generally cheaper. Homes in short sales fetch more than foreclosed properties. And lenders often have to pay tens of thousands of dollars in legal and maintenance expenses on distressed properties.

But some banks are changing their stance. With profits improving and access to capital loosening, lenders can afford to play hardball. Today banks take 9.5 weeks to respond to short-sale requests, vs. 4.5 weeks a year ago, says research firm Campbell Communications. "When the banks couldn't make payroll, it was a lot easier to deal with them," says Jake Naumer, an adviser in St. Louis who has negotiated with lenders on behalf of homeowners. "Now they want to extract every nickel." Lenders argue they have every right to pursue the money they're owed.

Las Vegas real estate agent Rob Jenson lost a deal after lenders dragged their feet. In April, buyers agreed to pay $747,000 for a five-bedroom Spanish-style home, the owner of which had $1.3 million of loans on the property. Jenson contacted the lender, Bank of America (BAC), about forgiving the remaining amount. BofA responded four months later, saying it wanted an additional $19,000 in cash from the seller, or a $38,000 promissory note payable over 10 years. Says a BofA spokesman: "A selling homeowner may be expected to reasonably participate in the shortfall on a sale, unless a financial hardship is demonstrated."

SOROS AND DELL

When the homeowner wouldn't come up with the money, Jenson agreed to give the bank $7,500 of his commission. BofA agreed to the terms. But by then the buyer had walked away. "They're losing more money in the long run," says Jenson.

As a policy, OneWest Bank requires borrowers who sell their homes for less than the mortgage to pay part of the difference. One West, formerly IndyMac Bancorp, was taken over last year by the Federal Deposit Insurance Corp. and purchased in March by a group of investors that includes billionaires George Soros and Michael S. Dell. As part of that deal, the FDIC agreed to eat most losses after the first $2.5 billion. Given the government's broad support of One West, some real estate agents and sellers are frustrated that the lender wants a promissory note—especially in cases where the government is picking up some losses.

The lender is currently reviewing its short-sale policies. In one recent deal, One West agreed to forgo a $75,000 promissory note from the seller, 48-year-old Chris Fox, an unemployed consultant in the hospitality industry. But it did so only after Fox complained on a local TV station in Phoenix. "It drives me up a wall," says Robert G. Hertzog, Fox's real estate agent.

"They were holding my client hostage." The short-sale transaction is set to close in late October. One West says it services the loan but doesn't own it, and therefore the government isn't on the hook for related losses.
The chain of creditors may be complicating short sales. If a borrower has two mortgages on a house, both lenders must approve the transaction.

And the banks that hold second mortgages may be getting tougher, as their stakes get wiped out by sharply reduced property values. Bob Dalsimer, an agent in Irvine, Calif., says BofA used to accept a token amount to relinquish its claim on a short sale where it held the second mortgage. Now it's asking for 5% of the sale proceeds.

Sellers have little defense for now. Although some states prevent banks from pursuing additional claims against owners in foreclosure, there are no such rules in short sales. "We really need a more organized process," says Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. In mid-May, Treasury Secretary Timothy Geithner proposed rules to encourage the transactions, including government payments to the lenders. People familiar with the matter say new federal rules could be imminent.

Borrowers who can't sell their homes often fall deeper into a hole. James Rosenthal, a 51-year-old Los Angeles film editor, has been trying to sell his house in a short-sale deal for more than a year. The servicer, One West, keeps misplacing his paperwork, he says. With income drying up, Rosenthal has fallen behind on his loan. One West says the mortgage is not eligible for federal reimbursement, and it would never intentionally delay a short sale.

In the meantime the missed mortgage payments, taxes, and late fees are piling up; as a result, Rosenthal's mortgage has ballooned by $40,000, to $425,000. "To have the government recapitalize [the lender] and get nothing in return..." he says. "The programs just aren't working" for homeowners.

Exercpt: http://www.businessweek.com/magazine...ef=patrick.net

[Kenneth A. Townsend]

Yep, My son had to negotiate it down, they (the mortgage insurance co.) were off the charts to start with. It still cost him his retirement money. People will start doing bankruptcy and leave them with the home.

[dbelmont]

But the bankers are protected and they know it. Which lets them refuse to play if they have to take a hit.

I supported keeping our financial institutions from melting down but am angered by our refusal (under both administrations so lets not start in with Obama did it) to insist that the banks invest their money on main street where it's needed. We payed to keep them whole and they thumb their noses at the common folk who took the hit.

We continue to operate under the delusion that the interests of the banks are the interests of the nation as a whole. We made the banks whole expecting they would let the money flow and instead they have only acted to line their won pockets.

[Patrick Bolliger]

Donald,

I hate to tell you this but NO bank is looking out for the interests of this nation. Banks are solely in the "business" of profiting from everyone on this planet. Even worse is the fact that the Federal Reserve is NOT a government entity and is looking to fundamentally control the entire financial world..through consolidation of smaller banks...

Don't believe me.. Do some research and see who these "people" are... IMF, CFR What are these "organizations"?

People are not paying attention to the creeping, looming change in wealth from the west to the east....
We paid for it and will continue to pay for it. Our money (every tax paying person) is baling out the most powerful entity in the world. Gotta love it.. Total control of the country and eventually the world through economic means...
Not through guns and oppression but financial control!! Your dollar is NOT worth the paper it's printed on yet you have faith in what it can "do"..

Gold is the only "legal" tender but who stocks gold bars in their house...

Why does the U.S. dollar have this printed on it: "This note is legal tender for all debts, public and private" ??
Plus it's a "Federal Reserve Note" unlike a 1953's bill I have that states: "This note is a legal tender at its face value for all debts public and private" or

1950's bill: This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury, or at any Federal Reserve Bank".

hmmm What does that mean?...Gold...YEP

Call me wacko or this a conspiracy theory but this started in 1913 when the Federal Reserve ACT was passed and has been creeping along as planned... The details are there and it's blended in with all the BS we see on T.V. You will be robbed blind...

[Michael Larson]

The problem is not lack of a gold backed currency.

The problem is the lack of suffcient reserves at the bank and poorly enforced regulation.

Fractional reserve banking works fine until you relax the rules and let them lend out more than is reasonable.

The banks are bankrupt.