A Way Out For Homeowners In Trouble Hits A Snag
Record numbers of Americans have lost their homes in the housing crisis, but one option that could help people avoid foreclosure is being snarled by the sheer volume of distressed properties nationwide, bank and real estate specialists say.
Short sales — in which a buyer and seller agree on a price that falls short of covering what is owed to the lender — can potentially benefit everyone involved. The seller escapes foreclosure, the buyer may get a more affordable deal, and the lender gets the property off its books while sidestepping foreclosure-related costs.
It's an attractive option, but it's also a tricky transaction that can involve lengthy delays and is prone to dying a slow death in the approval process.
A Frustrating Process
Joe White moved to Las Vegas in 2005 and bought a $400,000 home a year later at the peak of the housing bubble. When the economy collapsed, so did his IT business, and then he fell behind on his mortgage payment.
So he listed his property for a short sale and got a buyer in hand — a couple who he says "loved the house and offered a fair market value." Eight months ticked by as stacks of paperwork were filed and re-filed to first and second mortgage holders and the mortgage insurer. In the end, it was the mortgage insurer that "blew up" the deal by asking for an $85,000 promissory note, which White says he couldn't swallow. The house went into foreclosure two weeks ago, leaving White exhausted and bewildered at why a good offer was rejected.
"They are having the house appraised now, and there's no way it's going to be worth more than the short sale offer. What kind of sense does that make?" he says. "I tried to do the right thing in a bad situation, but they just didn't care."
The number of short sales, while minuscule compared with foreclosure sales, has more than tripled in recent years, from about 65,000 in 2007 to 233,000 last year, according to the real estate data services company CoreLogic. As more people look to short sales as a way out, the complex process has exposed deficiencies among real estate agents and banks.
"The No. 1 biggest factor as to why short sales aren't going through is flat-out disorganization," says Brad Geisen, CEO of Foreclosure.com, a Florida company that specializes in providing statistics on distressed property and software for lenders.
It's almost impossible to pin down the percentage of initiated short sales that are completed, Geisen says, but the national average probably hovers at 10 percent to 15 percent.
Bank staff and real estate agents have been staggered by the mountain of mortgages gone bad — the scope of which few people anticipated before the housing bubble burst in 2006, Geisen says. Both GMAC and JPMorgan Chase recently suspended tens of thousands of foreclosures across the U.S. because of potential errors in documentation.
A Flood Of Paperwork For Banks
Since the crisis began, banks have been forced to undertake a massive expansion of their "loss mitigation" departments, adding thousands of workers to handle the unprecedented volume of requests for loan modifications, short sales and foreclosures.
JPMorgan, which owns some mortgages and acts as a loan servicer for many Freddie Mac- and Fannie Mae-backed loans, says it has hired 6,000 employees since 2009. Wells Fargo says it has added more than 12,000 employees over roughly the same period.
Jeff Lischer, managing director for regulatory policy at the National Association of Realtors, says banks had little experience with short sales when the housing crisis hit and that it took them a long time to add staff to handle these kinds of sales.
As late as 2008 — two years after the housing market began to implode — "it looked to NAR like the banks didn't understand the scope of the problem," Lischer says.
RealtyTrac Senior Vice President Rick Sharga agrees that banks have been overwhelmed.
"What we never intended to see was short sales as a mass-market product," he says. "It has taken the [loan] servicers a lot of time to ramp up and get trained."
Training has been a problem for the real estate side of the equation, too. Agents have struggled to navigate a complex type of sale that many had never seen before the bubble burst.
"A lot of agents just don't have the experience," says George McDowell, a Realtor at Coldwell Banker in Severna Park, Md., who handles short sales. Realtors "need to anticipate every piece of paperwork the bank is going to need and have it ready to go from the start. A lot of them just don't do that."
In Maryland, only 17.3 percent of the 13,275 properties offered for short sales in the past year were brought to a close, according to a Coldwell Banker broker's analysis of multiple listings data.
The National Association of Realtors offers a short sale certification course that has been completed by 51,000 agents since October 2009. But Lischer says agents aren't required to get the certificate before working a short sale.
The High Consequences Of Failure
The consequences of the low completion rates for short sales are high. Most sales that fall through will move quickly into foreclosure. For homeowners, foreclosures cause more damage to credit scores than do short sales. For lenders, the costs associated with a foreclosure run in the tens of thousands of dollars, and they are likely to lose twice as much or more on the price of a foreclosed home than they would on a short sale, according to RealtyTrac.
Foreclosed homes often mean unoccupied properties that can be targets of vandalism and drive down surrounding home values.
But completing a short sale hinges on a delicate dance involving all parties who have a stake. The homeowner, the potential buyer and the mortgage holder must agree to the terms. Even if that happens, a deal can be scuttled by a second mortgage holder, the mortgage insurer or even Wall Street investors who stand to lose if a securitized mortgage falls apart.
Delays also can kill a potential sale. Real estate agents complain that it takes lenders far too long to say yes or no on a short-sale offer — six months or more in some cases, according to McDowell.
Frustrated buyers are likely to walk away from a deal that takes too long, and it isn't uncommon for banks to consider a short-sale at the same time they are pushing a property through the foreclosure process.
"Sometimes the right hand doesn't know what the left hand is doing, and the property is foreclosed upon while a short sale is on the verge of going to closing," says Lischer of the National Association of Realtors.
Jeff Mix, a Realtor for iRealty in the Las Vegas suburb of Henderson, says he's fed up with pursuing short sales only to see them collapse.
"I'm to the point where I am thinking it just doesn't make any sense to take on any more short sales. I spend months working them, and then they fall through," Mix says.
The delays have gotten Congress' attention. Reps. Robert Andrews (D-NJ) and Tom Rooney (R-FL) introduced a bill last month that would require lenders to respond to short-sale requests within 45 days. The legislation is strongly supported by the National Association of Realtors.
A Better Outcome Than Foreclosure
Banks acknowledge that they face enormous challenges in coping with the volume of foreclosure-related transactions.
"It's a complicated transaction," says Tom Goyda, a spokesman for San Francisco-based Wells Fargo. He adds that the process is made more challenging by the fact that there's often "a range of quality of short sales applications that come through."
"Some are missing documents," which delays their processing, he says.
JPMorgan spokesman Tom Kelly says, "We have staffed up and improved our processes in the past year to get answers faster, but we have a fiduciary responsibility to get the best price for sale."
Still, both bank spokesmen acknowledge that a short sale is a better outcome than foreclosure for everyone involved.
RealtyTrac's Sharga says that when there's a viable short sale in hand, it's well worth the effort for lenders and borrowers to pursue it.
"It's not just a question of who wins and who loses," he says. "It's really a question of can everybody lose a little bit less in a short sale than in a foreclosure."