Mark Hartmann

By Barbara Pronin, RISMedia Columnist
A new law signed recently by California Governor Jerry Brown offers extended protection to state homeowners who are forced to short sell their homes.

SB 458 ensures that any lender who agrees to a short sale must accept the agreed-upon short sale payment as payment in full on the outstanding balance of all loans, including second mortgages.

The previous law, SB 931, enacted in 2010, held that a first mortgage holder must accept the agreed-upon short sale amount as full payment, but the law did not extend to junior lien holders.

“The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender could pursue them after the short sale closes, and demand additional payment to subsidize the difference,” says California Association of REALTORS® President Beth L. Peerce. “The new law brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders—those in first position as well as in junior positions – must consider the outstanding balance as paid in full, and the homeowner will not be held responsible for any additional payments on the property.”

An urgency clause in the new law makes SB 458 effective immediately upon signing.

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Unfortunately, with the economy’s slow recovery and still-high unemployment rates, many homeowners continue to confront difficulties in making their mortgage payments. If you’re one of these homeowners, know that you’re not alone and know that there are several options to explore prior to foreclosure, such as a short sale. A short sale occurs when the outstanding loan(s) against a property are greater than what the property can be sold for.

As you’ve probably heard, however, short sales can be a drawn out and complicated process. Here are five tips to help you create a successful short sale:

1. Get comparable sale prices and an estimate of expected closing costs to help verify the current market value of your home.

2. Determine the amount of all loans against the property. Subtract the total amount you owe on the property from the estimated proceeds of the sale.

3. Contact your lender or lenders. Insist on speaking with someone in authority about a short sale. Remember that you are asking the lender to accept less than the total amount you owe, so be firm but cooperative.

4. Be prepared to submit the necessary documentation, including a letter of authorization giving the lender permission to talk with specific interested parties about your loan. Include your name, address, the loan number, and your agent’s contact information.

5. Include a hardship letter describing how you got into a financial bind, and provide proof of your assets and income. You also may wish to include recent bank statements, with an explanation of any unusual deposits or withdrawals, and your broker’s competitive market analysis.

Be sure to work with a real estate agent who has experience in short sales. Many agents have been through comprehensive short sale training and received special distressed property designations. Above all, the short sale process requires patience-even after you find a buyer. But for many homeowners, it was well worth it.

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Real estate professionals know that a short sale transaction can take months for it to be approved and closed.

The reality is that short sales usually take three to four times as much as a regular sale to finally get to the closing. From the time the Realtor actually gets the property under contract to the time the lender approves, it could take anywhere from 30 days to six months, depending on how fast the borrower provides critical information for lender and Investor approval.
Even then, you still have one more variable to account for which is the buyer waiting for all this time to get the contract approved by the lender. For this, setting the expectations is a key factor in any short-sale transaction.

Buyers Expectations
Buyers who make an offer on a short-sale property need to know that lenders have to “reverse underwrite” a short-sale and make sure that they are allowing the sale to happen close to market value. I say “reverse underwrite” because instead of determining affordability, they will look for “un-affordability.”

They will check the seller’s financials to verify that they can’t afford the house anymore and consequently, they will order a price opinion from a broker or certified appraiser, commonly known as BPO (Broker’s Price Opinion) to make sure the house is being sold close to market value. If the offer is too low compared to what is owed, it will make more financial sense to the Lender to just foreclose the property and re-sell it as an REO (Bank-Owned Property). All this will happen while the buyer is still waiting for a response so it is very important to set the expectations correctly from the beginning to avoid losing the buyer close to the end of the process.

Seller’s Expectations
On the other hand, it is important to also educate the Seller and set the expectations with them from the beginning. They need to understand that the Lender takes its time responding, but when they do, they usually give a 72-hour timeframe to respond or provide the missing documentation. If the documentation is not provided within the specified timeframe, it usually ends up in a closed file and countless work-hours lost. Another common situation that is happening very often is borrowers being served with foreclosure paperwork from either the lender or homeowner’s association while the short-sale is being processed. It is crucial to let them know that this might happen so that they are prepared for it and receive the documents knowing that they are in the best hands. Foreclosure and short-sale are parallel processes and one does not cancel the other. Sometimes a short-sale might delay a final sale date, but it will definitely not stop the Lender from starting the foreclosure proceedings.

Closing the Short Sale
Short sale success comes from educating not only the seller but also the buyer and everybody else involved in the transaction. Setting the right expectations is the most crucial part of a short sale. There are many hours involved in processing a short sale and the last thing you want is a seller or buyer walking away because the expectations were not set correctly. 

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While you may have heard that selling your home as a short sale can be a long, frustrating, and sometimes futile process, the tide may be turning as lenders have become increasingly more amenable to short sales. Many lenders, says real estate professional and educator Gee Dunsten, are viewing short sales in a more favorable light after suffering through failed loan modifications and countless foreclosures.
Before embarking on the short sale process, however, talk to a REALTOR® who is experienced in the area of distressed properties. Dunsten asks all his clients to start by completing the following questionnaire. One of the top reasons short sales fail is because the home seller never actually qualified for one in the first place. Answering the following questions accurately and thoroughly will determine whether your home is eligible for a short sale:

1. Is your property currently on the market? Is it listed with an agent?
2. Is this your primary residence?
3. When was the property purchased?
4. What was the original purchase price?
5. Who holds the mortgage?
6. What kind of loan do you have? (FHA, VA, Conventional)
7. Do you have any other liens against your property?
8. Who is on the title (or deed) for the property?
9. Who is on the mortgage?
10. Do you have mortgage insurance?
11. Are you current with your payments? If not, how far in arrears are you?
12. How much do you owe?
13. Why do you need/want to sell?
14. What caused you or will be causing you to miss your mortgage payment obligation?
15. Do you have funds in accounts that could be used to satisfy the deficiency?
16. Are you currently living in the property? If not, where are you living and is the property being maintained?
17. How soon do you need to move?
18. Are you up to date on your condo or HOA payments (where applicable)?
19. Do you owe any back taxes?
20. Are you considering filing for bankruptcy protection?
21. Are you currently pursuing a loan modification with your lender?
22. Who is occupying the property?
23. Do you hold or are you subject to any type of security clearance related to your job?
24. What are your plans after you sell?
25. Are you looking to receive any money from the sale of your home?
26. How much income are you currently making from all sources?
27. Do you anticipate any income change up or down in the not-too-distant future?

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Today, as millions of homeowners struggle with what to do when the value of their property becomes less than the mortgage they owe-particularly those recently unemployed or unable to make their monthly payments-there is a growing need for clear, unbiased consumer protection information on these vital topics.

Meeting this need head-on, Jim Soda of Prudential Lakewood Ranch Realty joined with others in the Top 5 in Real Estate Network to release “The Four R’s of Short Sales…and More: The Transparent Approach to a Real Estate-Related Crisis.” This very timely resource provides a 360 degree view of the current issues facing so many homeowners and offers insights to help consumers best work with their lenders and attorneys to address their own unique circumstances.

Indeed, this new publication, which will be distributed across the United States and Canada by real estate agents in the Top 5 in Real Estate Network , urges concerned homeowners “to meticulously evaluate all of their options before making a decision; especially a decision that may have both short- and long-range consequences.”

One financial arrangement that has become increasingly common in the marketplace the “short sale” is an agreement by a lender (or lenders) to accept the sale of a property in which there is a shortage of funds necessary to pay off the outstanding loan balance along with a number of the lender-stipulated criteria being met. “We recommend that homeowners consider all options when seeking a resolution to mortgage-related financial challenges. The short sale is just one possible outcome that homeowners should evaluate when facing a distressed mortgage situation,” said Allan Dalton, President, Top 5 in Real Estate Network .

It is vital for homeowners to not only seek the advice of a trusted pre-foreclosure professional, but to also be wary of “Preforeclosure Predators,” according to Soda. “At all costs, homeowners must ensure that they are not exploited or manipulated during this most vulnerable period of homeownership. Regrettably, the burgeoning short sale marketplace is attracting hordes of unscrupulous individuals who are seizing any and all opportunities to prey upon beleaguered and unsuspecting homeowners who are not aware of the range of options available to them when experiencing the growing challenge of “upside-down homeownership.”

“It is imperative that any homeowner seeking to determine if a short sale is in their best interest, be able to distinguish between their own interests and the interests of lenders, buyers, investors, and real estate-related professionals, and how these different interests may influence their decision,” said Soda. “We have compiled a series of questions that will serve as an important precursor for homeowners to consider and discuss with their attorneys prior to their pre-foreclosure decision.

Top 10 Questions to Talk Over with Your Attorney

-What are my options as a homeowner when my property is in or heading toward default? -What is a better or more likely outcome for me and why?

A short sale or a repayment plan?

A short sale or a forbearance plan?

A short sale or a loan modification?

In the case of an FHA loan, a short sale or a partial claim?

A short sale or a short sale/assumption agreement?

A short sale or a deed-in-lieu of foreclosure?

A short sale or a bankruptcy?

-How do I know if my property and I may be considered for a short sale?

-How would I initiate the short sale process?

-Which process has a more adverse effect on my credit rating: short sale, foreclosure, bankruptcy, or deed-in-lieu of foreclosure?

-What types of hardships would a lender generally consider favorable toward my appeal for short sale consideration?

-On average, how long does a short sale process take?

-What are the tax implications of a short sale?

-If a lender agrees to the short sale option on my property, can the bank still proceed with a foreclosure?

-Is there a real estate commission paid in a short sale? If so, who pays it?

-When is a bankruptcy preferable to a short sale or to a foreclosure?

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Short sales will remain strong for the next several years as foreclosure inventories timelines grow even longer, according to the chief operating officer of Equator, a premier software platform for default servicers.
“Short sales will be very prominent over the next 2-3 years as foreclosure inventories increase and remain somewhat stagnant. The elongated foreclosure timelines coupled with improved processes and technology will lead to more short sales closing,” says John Vella, COO of Equator.
Equator reports some 775,000 real estate agents handling an average of 250,000 transactions per day access its platform.

Last week LPS reported the median foreclosure timeline now is 587 days. In May, CoreLogic predicted the number of short sales will increase 25 percent next year after tripling over the past two years.
New federal regulations that took effect April 10 are expected to add to the interest in short sales by removing barriers involving second liens. Prior to this change, secondary lien holders were unlikely to receive any portion of the proceeds of the sale. This likelihood was increased if the property was in a state of negative equity. The secondary lien holder could block the approval of the short sale by refusing signoff on zero pay-off.

Due to the change in the laws regulating short sales there are now incentives for secondary lien holders to approve the sales. There is also an incentive for the seller to pursue this option. Secondary lien holders will receive a portion of the sale proceeds; an amount of at least $3,000. They will also receive an additional $1,000 from the federal government and sellers will receive an incentive of $3,000 for relocation expenses.

For more information visit www.realestateeconomywatch.com. 

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A: Sometimes. But it is a complicated process and a lot will depend on the lender.

This process is called a “short sale,” which occurs when a lender agrees to write off the portion of a mortgage that’s higher than the value of a home. But, usually, a buyer must be willing to purchase the property first.

A short sale may be more complicated if the loan has been sold in the secondary market. Then the lender will need permission from Freddie Mac or Fannie Mae, the two major secondary-market players.
If the loan was a low down payment mortgage with private mortgage insurance, the lender also will need to involve the mortgage insurance company that insured the low down payment loan.

The short sale can keep the homeowner from landing in bankruptcy or foreclosure. But it is not an easy procedure to approve, and it involves as much, if not more, paperwork than an original mortgage application.

Instead of proving your credit worthiness and financial stability, you must prove you are broke. And any remaining difference between your home’s value and the balance on your mortgage is considered a forgiveness of debt, which usually means it is taxable income. 

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The new short sale guidelines just announced by Fannie Mae will streamline documentation requirements, waive deficiencies for borrowers that successfully complete a short sale and set standard payments for subordinate lien holders, the organization reports. The new guidelines are for servicers to follow as part of the Federal Housing Finance Agency’s Servicing Alignment Initiative. In addition, all servicers will have the authority to approve and complete short sales that conform to the requirements without receiving individual approval from Fannie Mae.
“Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” says Leslie Peeler, senior vice president, National Servicing Organization, Fannie Mae. “We want to help as many homeowners avoid foreclosure as possible. It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us. These new guidelines will open doors to help more homeowners qualify for short sales, remove barriers to completing short sales, and make the process more efficient for homeowners and servicers.”

Under the new guidelines, servicers will be permitted to approve a short sale for borrowers who have certain hardships but have not yet gone into default. Those hardships include the death of a borrower or co-borrower, divorce or legal separation, illness or disability or a distant employment transfer. In addition, Fannie Mae is significantly reducing the documentation required to complete a short sale, including requiring no documentation of a borrower’s hardship 90 days or more delinquent and have a credit score lower than 620. This will remove barriers for those homeowners who are most in danger of foreclosure and increase servicer efficiency in completing a short sale.

Fannie Mae will also limit subordinate-lien payments to $6,000. Previously, subordinate lien holders often attempted to negotiate higher payments. The servicer will be able to offer the maximum payment of $6,000 in order to facilitate the transaction. By setting a standard payout amount and a limit for every transaction, Fannie Mae is removing the guess work and standardizing the transaction to help accelerate the short sale process.

Fannie Mae has taken a number of steps to make the short sale process more efficient, including implementing a Short Sale Assistance Desk to help real estate professionals in targeted markets work out challenges in individual short sales, requiring servicers to complete short sale evaluations within 60 days and making military families who receive Permanent Change of Station orders eligible for a short sale. Fannie Mae completed 38,717 short sales through the first six months of 2012 and 70,025 in full year 2011.

Homeowners can learn more about short sales, modifications and other foreclosure alternatives at www.knowyouroptions.com. 

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By Daniel Manzano
Anyone that works in the real estate industry knows that a short sale transaction can take months to be approved and closed. While short sale approvals can be completed in a short timeframe, the reality is that short sales usually take three to four times as long as a regular sale to finally get to the closing.
From the time the REALTOR® actually gets the property under contract to the time the lender approves it, it could take anywhere from 30 days to six months, depending on how fast the borrower provides critical information for both lender and investor approval. Even then, you still have one more variable to account for, which is the buyer waiting all this time to get the contract approved by the lender. To account for the numerous variables that accompany a short sale transaction, it is crucial for real estate professionals to set clear expectations before beginning the short sale process.
Buyers’ expectations
Buyers who make an offer on a short sale property need to know that lenders have to “reverse underwrite” a short sale and make sure they are allowing the sale to happen close to market value. By reverse underwriting, lenders will look for “un-affordability” instead of determining the home’s affordability. They will check the seller’s financial documents to verify that they can’t afford the house anymore and consequently, they will order a broker’s price opinion (BPO) from a broker or certified appraiser to make sure the house is being sold close to market value. If the offer is too low compared to what is owed, it will make more financial sense to the lender to just foreclose the property and re-sell it as an REO (Bank-Owned Property). All this will happen while the buyer is still waiting for a response, so it is very important to set the expectations correctly from the beginning to avoid losing the buyer close to the end of the process.

Sellers’ expectations
On the other hand, it is important to also educate the seller and set the expectations with them from the beginning. They need to understand that the lender takes their time while responding, but when they do, they usually give a 72-hour timeframe to respond or provide the missing documentation. If the documentation is not provided within the specified timeframe, it usually ends up in a closed file. Another common situation that is happening very often is borrowers being served with foreclosure paperwork from either the lender or Homeowner’s Association while the short sale is being processed. It is crucial to let the seller know that this might happen so they are prepared and receive the documents knowing they are in the best hands. Foreclosures and short sales are parallel processes and one does not cancel the other. Sometimes a short sale might delay a final sale date, but it will definitely not stop the lender from starting the foreclosure proceedings.

Daniel Manzano is Managing Director of Best Beach Title in Miami.

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