What is a short sale?

A short sale is a transaction in which the lender, or lenders, agree to accept less than the mortgage amount owed by the current homeowner. For example, a homeowner's mortgage may be $300,000 and their home may only be worth $250,000. A short sale works towards getting the lenders to let the homeowner sell their home for market value, even though that might be below the amount of the mortgage payoff. In some cases, the difference in the mortgage amount and the sales price is forgiven by the lender. In other cases the homeowner must make arrangements with the lender to settle the remainder of the debt - for example by signing a promisory note.

Why is the number of short sales rising?

Due to the recent economic crisis, including rising unemployment, and drops in home prices, the number of short sales is increasing. Since a short sale generally costs the lender less than a foreclosure, it can be a viable way for a lender to minimize its losses. A short sale can also be the best option for homeowners who are “upside down” on mortgages because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.

What challenges have short sales presented?

The rapid increase in the number of short sales, and the short sales process itself present a number of challenges. The major challenges include:

1. Length of time:
   Many lenders are new to the short sales process; a difficulty which is compounded by their lack of sufficient and experienced staff to process short sales. Most mortgage servicers are under-staffed and still not adequately trained, making negotiating a short sale particularly difficult. As a result, the time frame for getting a short sale approved can be on average 4 months. Many buyers do not have the time or patience to wait that long for a response.
   

2. Absence of a uniform process and application:
   Currently, both short-sales documents and processes are lender-specific, making it very difficult and time-consuming to anticipate all documentation that may be needed to complete the transaction. Unresponsive lenders, lost documents that require multiple submissions, and inaccurate or unrealistic home value assessments by the lender also add to the challenge of completing the short sale process.
   

3. Multiple lenders:
   When more than one lender is involved, the negotiations are much more difficult. Second lien holders often hold up the transaction to exert the largest possible payment, in exchange for releasing their lien, even though in foreclosure they will get nothing. These hold-ups result in long processing delays and cause buyers to walk away.
   

What is being done to address or eliminate these challenges?

The Obama Administration announced its upcoming Foreclosure Alternatives Program, which will be launched on April 5, 2010. Among other things, the new program:

• Establishes financial incentives for servicers, sellers, and second lien holders to encourage the completion of short-sale transactions.

• Requires that a timeline, of no fewer than 90 days, be set to allow a homeowner to sell a home, without threat of foreclosure action.

• Requires the short sale agreement to specify reasonable and customary costs to be deducted from the sales prices.

• Will provide standardized documents, including short-sale agreements and offer acceptance letters.

The next blog will go into more detail about the Foreclosure Alternatives Program as it relates to short sales.

As you can see, the short sale process is a complicated one which requires the assistance of an experienced Realtor. If you or someone you know needs help examining their options to avoid foreclosure, contact The Ethridge Team today.