Gambling with Short Sales – by Ashley Leigh

25 06 2010

Lately, the economic news has a few glimmers of good news.  I believe things are no longer as dire, dark or gloomy as they were just a few months ago.

Yet, there is lots of room for improvement.  And lots of ground to recover before we can say this mess is behind us.

I’ve been thinking that the current decline in housing prices is not good for anyone.  It definitely hurts the seller.  And, if that seller is upside and has to sell, it hurts the lender as well.  Curiously, it can hurt the buyer too.  More on that in a minute.

There are four market forces conspiring against a healthy real estate market.  And just what is a ‘healthy’ real estate market?   It happens when there are an equal number of buyers and sellers, acting prudently, each wishing to buy and sell a home.  It was crazy during 2005- 2007 … that period of “irrational exuberance”.  And now it is the backlash getting the market back into equilibrium.  I guess there is some sort of balance in the universe.

So, the four market forces … jobs, consumer confidence, lending guidelines, and interest rates.

JOBS – The Bureau of Labor Statistics tracks the official unemployment rate, both nationally and regionally.  As jobs decline, fewer people are working which means less buyers which causes the real estate market to contract which, in turn,  forces sales prices down, and finally, which contributes to homeowners being “upside down”

CONSUMER CONFIDENCE – The Consumer Confidence Index, produced by the Conference Board, is a monthly calculation detailing consumer attitudes and buying intentions.  It is at a 15 year low.  As consumer confidence declines,  fewer people are willing to spend money which means less buyers which causes the real estate market to contract which, in turn, forces sales prices down, and finally, which contributes to homeowners being “upside down”.

Lending Guidelines – The Federal Reserve tracks lenders’ willingness to loan money to consumers.  Lately, the Fed reported a “substantial” portion of banks tightened their mortgage lending standards.  As lending guidelines tightened, fewer people are able to borrow funds, which means less buyers which causes the real estate market to contract which, in turn, forces sales prices down, and finally, which contributes to homeowners being “upside down”.  Starting to sound familiar?

Interest Rates – The one bright spot!  Rates have not been this low since … let’s see … George Washington didn’t see rates this low!  However, the downside effect of the three other forces are too strong and they too easily overpower the upside effect of the low interest rates.

The bad result of these conspiring market forces is foreclosure rates are at unprecedented levels.  Homeowners, when forced to sell by job loss, relocation, or any other reason, can’t get enough to pay off their home loan.  They either have to sell their home “short” or let it go into to foreclosure.  Each new short sale or foreclosure sets a new low in that neighborhood.  That is terrible for that homeowner specifically and for the neighborhood in general.

Most lenders would rather approve a short sale than take another property into their bulging inventory of foreclosed-upon properties.  The banks call these homes REOs which means Real Estate Owned.

Buyers should be jumping for joy.  Wow! Look at how low the prices are getting, they say with glee.  But the buyer needs cash (banks actually want a down payment and a job … go figure).

But here is the rub.  This is where the gamble comes into play.

The homeowner is going through an emotional agony.  They are in a spot never foreseen in their scariest nightmares.  The decision to actually sell rests in the lender’s hands as the lender has to give their approval before the transaction can close.

Lenders are not moving quickly in making those decisions.  Why should they?  They are losing buckets of money. The lenders’ financial solvency hangs in the balance.  Therefore, they are taking great care.  They are doing their “due diligence”.  And they are swamped.  A representative from one of the larger lenders told me they had 140,000 unassigned cases earlier this year. 

The lender wants to minimize their losses.  Of course, they do.  We all would want the same thing if we were in their shoes.  So, they want to see how they can get the most money owed them by the homeowner.  So, they drag the homeowner over the coals to see what other assets they might be able to get to cover the loss.

This takes time, or at least, the lender makes it take time.  In the mean time, the seller is twisting in the wind and the buyer is wondering if they will actually be able to get the house.

This is why short sales are not great for buyers.  They could wait three or four or six months hoping the lender approves the transaction.  And, then, at the last minute, the deal falls apart.

Why?  Because the lender tells the homeowner they want some pretty significant terms.  Terms like asking the homeowner to sign a promissory note for the shortage.  Or, the lender wants to retain the right to pursue collections against the homeowner after the short sale closes.  That condition could hang over the seller’s head for six years.  Anytime during the six year period, the lender could then sell the unpaid balance to a collection company.  Then, the collection company could pursue a financial judgment against the former homeowner.  That judgment could hang around for 20 years.  None of that is too appealing to the homeowner. 

Homeowners decide those terms are too onerous and tell the lender, sometimes in more colorful language than this article would permit, to take the home in foreclosure.  The homeowner decides trashing their credit history is better than the worry of some bill collector coming after them for an unknown number of years.

The problem is that the homeowner and the buyer do not learn about the lender’s conditions until after the long wait of three to six months.

And that is a lose-lose-lose.  The homeowner has their credit history trashed with a foreclosure.  The lender has yet another property in their REO department (and they will lose even more money now!).  And the buyer is shut-out of the transaction.

So, short sales are a gamble for everyone. 

Yet, there is a solution and it rests with the lender.  You see, the lender knows (or can closely estimate) the bottom line expense of their three alternatives.

  • The lender could agree to modify the loan.  They would know exactly financial impact of that alternative.

 

  • The lender could agree to a short sale without holding the seller under a guillotine.  They would know exactly financial impact of that alternative, too.

 

  • Finally, the lender could take the house in foreclosure.  They can closely estimate the financial impact of this as well.

 

So, the lender can weight the three alternatives and take the one which results in the least cost to them.  Sure, it is still a loss, but in a backward sort of way, they are ahead because they cut their losses.  I know losing money doesn’t hurt when it is not your money.  But that is where the lender is.

I know short sales can be done.  And I know when done properly by the three players … homeowner, lender, and buyer … it can work out for all three.

But, given the way the economy is behaving, given the way some lenders are still thinking “old school”, short sales are a gamble for everyone.

Call me today to discuss your specific situation.  I’ll give you honest opinions aimed at best serving your needs.

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