Loss Mitigation: Short Sales: Nothing Short about the Approval Process.

With the current housing mess people think that banks would be chomping at the bit to approve short sales. That is when a lender approves for a sale which is less than the face mortgage balance. Banks and lenders do not operate under a charity model. They will only approve a short sale if they believe in the long run that they will be saving money. This equation doesn’t always work out to the benefit of the current seller. Also, banks are currently inundated with REOs which are taking over a lot of the time of those in the loss mitigation departments.

If you are looking for your lender to approve a short sale you are going to need to have patience but also present a convincing case that by accepting a current lower offer the bank will save money from avoiding unnecessary lengthy foreclosure sales and money sinks. This is not always an easy thing to convey:

“(LA Times) RESIDENTIAL short sales sound like a picnic: Owners need to sell their homes for less than they owe, lenders forgive the difference and buyers grab a good deal.

If only. This is one picnic that requires a long wait for dessert. The only “short” thing about short sales, buyers and sellers say, is one’s patience.

“The waiting is torture,” said Mark Shandrow, a Keller Williams Realty agent in Long Beach who specializes in such transactions. “The banks are overwhelmed with short-sale requests, and some make sellers wait five months for an answer.” That answer, in many cases, he added, is “no.”

Yet despite the obstacles to successful short sales — lenders holding the first and second mortgages don’t agree on the terms, buyers often ditch the deal midstream or banks nix the agreement just before escrow closes — they’re on the rise. Countrywide Financial Corp. of Calabasas, the largest U.S. home lender, reports a nearly 60% increase in those transactions nationwide in April, the latest month for which statistics are available, from the same period a year earlier.

In the Santa Clarita and San Fernando valleys, the number of short sales increased from at least 31 sales from May 2006 to May 2007 to at least 1,956 sales from May 2007 to May of this year, according to the Southland Regional Assn. of Realtors.

The reason for the rise, experts say, is that as more financially strapped homeowners fall behind on their mortgage payments — and see their homes’ values plummet to less than what they owe — they’re turning to short sales as an alternative to foreclosure. Banks, once loath to take on short sales because, among other reasons, they were understaffed for the application onslaught, are tackling them now mainly because they’re more cost-effective than foreclosures.

“Banks aren’t happy about short sales,” said Sherri Frost, a senior loan officer with Sherman Oaks-based Metrocities Mortgage, “but they have few options.”

Unlike a foreclosure, in which the lender takes ownership of a property after a borrower misses several payments, a short sale is a transaction in which the owners, not the bank, sell the home; they receive no proceeds from the sale. In a foreclosure, the defaulting owner may receive sales proceeds once the lender has been paid, if the amount exceeds that of the outstanding loan.

If a short-sale borrower owes $500,000 on a home, the bank may accept a payoff amount of $450,000, the amount a buyer has offered to pay. The sellers need not be in default — meaning they stopped making mortgage payments — in order for a lender to consider a short sale, but they must be able to show a real hardship to receive the debt forgiveness, which may have tax consequences.”

Given that some are looking for reductions of $200,000 or even more, many lenders will balk at these offers. Given the current landscape of the housing market in California many people are simply going to be stuck and a short sale will most likely not even be an option. Many will simply stop paying and walkaway from their mortgage obligation. Loan modifications are just as hard to come by and lenders again are not going to provide charity.

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2 Comments on this post

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  1. Jon Christopher said:

    I have had some banks take as long as a year to accept a short sale and others have given me an approval in as little as 1 month. Countrywide is notorious for being difficult.
    Jonathan Christopher of Short Sale Way

    June 16th, 2008 at 5:44 am
  2. Greg B said:

    Has anybody worked with GMAC and based on their experience, how long did it take them? Thanks

    January 28th, 2009 at 7:18 pm

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