If you're a homeowner nearing foreclosure, you may think a short sale offers a good option. With a short sale, the bank agrees to accept less than the amount owed and forgive the rest of the money due. This can be a win-win situation: The seller gets out of a jam without a foreclosure on his or her record, and the bank reduces costs because it doesn't have to spend money on the foreclosure process --as long as the bank gets a reasonable offer on the house.
That's where the problems start. What is a reasonable offer? For banks, the bar seems to be high. Banks have been dragging their feet, often for several months, after receiving an offer in the hopes of a better one coming along. In a typical scenario, the buyer gets frustrated waiting and finds another deal. The homeowner finally faces foreclosure, even though a short sale was possible had the bank acted more quickly.
The U.S. Treasury Department decided to end the game playing. New guidance by the U.S. Treasury Department imposes a 10-day deadline on lenders and investors to make a decision on a short sale offer. The 83 loan servicers who are now participating in the Obama Administration's Home Affordable Modification Program, including Bank of America and JPMorgan Chase must follow these guidelines
for all borrowers who request short sales or who did not complete loan modifications.
Fannie Mae and Freddie Mac, who hold or guarantee about half of all mortgage debt, have not yet issued their guidelines on short sales, but since both are under U.S. government conservatorship, they likely will come up with similar guidelines.
Lenders have until April to comply with the new guidelines. If they fail to comply they could face substantial penalties including fines and reduced incentive payments. The U.S. Treasury may also require lenders to modify loans they rejected if they don't comply with the new short sale guidelines.
All this could be great news for both sellers and buyers. Sellers may finally be able to sell properties that have been on the market for months or even years, and buyers may be able to find some great deals.
But there's a potential snag: second lien holders. Many people have both a first mortgage and a second mortgage. They may even have a third mortgage. Often a short sale will cover the outstanding debt of a first mortgage, but not that of a second mortgage, such as an equity line. To try to get more acceptance from second mortgage holders, who wouldl likely get nothing in the case of foreclosure, the Treasury department is offering a $1,000 incentive to first mortgage holders who are willing to give second lien holders a $3,000 incentive to accept the short sale. They still may not be enough.
Realtors in Florida have just about given up on showing short sale homes. In fact, one Realtor in central Florida told the Orlando Sentinel
he tells his clients to expect at least a 60-day wait
if they want to buy or sell a home via short sale.
I went out recently with a family member who wanted to buy a home in central Florida. Originally he intended to buy a short sale, but the Realtor he was working with was told not to even show them because they can't get the deals closed. He was told he could wait months for an answer and still not be able to come to agreeable terms with the bank. Instead, he bought a new home that had been on the market for about two years. After some intense negotiation, the builder dropped the price by $80,000 from its original listing price. He got a great deal, but the poor homeowner who may have gotten his house sold in a short sale missed out on a deal.
Hopefully these new rules from Treasury will start moving short sale homes. Nearly half of the roughly 838,000 single-family mortgage holders in South Florida are underwater (meaning they owe more on their home then it is worth), according to Zillow. You'll find similar statistics in the other hard hit real estate areas, such as California, Arizona and Nevada. Giving people a way to get out from under on their underwater homes will help the economy heal even faster.
Lita Epstein has written more than 25 books including
The 250 Questions Everyone Should Ask About Buying Foreclosures.