3 Landmines That Can Destroy a Short Sale

There are some assumptions that a short sale negotiator can make that will wreak havoc on the process.  Here are a few common mistakes inexperienced negotiatiors make, and tips on how to avoid them.

Landmine #1: Assuming lender approval of an offer will automatically postpone foreclosure proceedings. 

In Washington State, lender approval of a short sale does not automatically halt a foreclosure sale. Once foreclosure proceedings are initiated, there are three parties involved in your transaction: the lender's loss mitigation contact, the lender's foreclosure contact (who is in a separate department), and an independent local trustee who has been hired by the lender to sell the property at auction.  Once lender approval is obtained, the relevant parties are supposed to take the necessary steps to take the foreclosure sale off the calendar.  However, there are instances where that does not happen, and the results can be disastrous. We recommend that agents always follow up with the loss mitigation department and local trustee to make sure they've received directions to cancel the scheduled foreclosure.  

Landmine #2:  Assuming that the short sale approval letter includes satisfaction of the seller's debt. 

Lenders may or may not issue a short sale approval letter to satisfy the buyer's debt or waive the deficiency in full.  Unless it is clearly stated in writing that the debt will be satisfied or the deficiency waived, you should assume that it is not.  While it is getting better of late, lenders can be notoriously vague on this subject in many of their letters. If you receive an approval letter that does not clearly outline satisfaction or a full settlement of the debt, it may require you to do further negotiation with the lender on your client's behalf. 

Landmine #3:  Assuming all banks have the same timeline. 

In the over 800 short sale transactions we've completed, we have seen timelines vary significantly from bank to bank. In our experience, after mutual acceptance is received it can take from 30 to over 90 days to get lender consent, depending on the bank. The investor on the loan may require another level of approval, and the existence of second liens and mortgage insurance can add yet more time to the process.  Knowing individual lender timelines is key in managing the expectations of the buyer and seller upfront.  

Some good news: Banks that use the Equator system- including Bank of America, Wells Fargo and Nationstar- have sped up the process considerably. The system includes deadlines and specific lender contact information, so it adds a level of accountability that helps you identify bottlenecks in the process and allows you to escalate things if necessary.           

Chase and Bank of America Paying Large Cash Incentives for Homeowners to do Short Sales

If you know someone who is underwater on their mortgage and has their loan with Chase or Bank of America, there's some good news. Both banks have started paying significant cash incentives to encourage sellers to do a short sale and avoid foreclosure. We've had clients in the past month get checks for up to $30,000.  Find out more information about Chase and BofA relocation assistance programs.

Short Sale Statistics Report- 1st Qtr 2012

Short sales and the sale of bank-owned properties showed steady increases in the Puget Sound area in the first quarter of 2012, according to the Washington Property Solutions 1st Qtr 2012 Short Sale Statistics Report.

In the first quarter of 2012, short sales and the sale of bank-owned properties accounted for 40 percent of all home sales (single family homes and condominiums) in King County. That figure was up from 36 percent in the first quarter of 2011.

In Pierce County, the percentage of distressed property sales increased from 43 percent of all home sales in the first quarter of 2011 to 54 percent in the first three months of 2012.

The jump in distressed property sales was particularly high in Snohomish County where the percentage increased from 38 percent of all home sales in the first quarter of 2011 to 51 percent in the first three months of 2012.

The full report includes historical sales data for both Short Sales and Bank-Owned Properties in King, Pierce, Snohomish and Kitsap counties.

New Washington State Laws Benefit Homeowners Doing Short Sales

The last week in March, the governor signed into law some significant changes that benefit homeowners involved in a short sale or facing foreclosure. If you have a client in either of these situations, you will want to let them know how they might benefit from these changes.

▪ Time Limitation for Collecting on Deficiency

A lender agreeing to the short sale of an owner-occupied property must now provide written notice of whether it intends to either waive or reserve its right to collect on the deficiency. Also, the time period to start legal proceedings to collect on a deficiency has been reduced from six years to three years. Again, these changes only apply to short sales of owner-occupied properties. They do not apply to foreclosures. In the case of foreclosures, a lender has up to six years to collect on a deficiency.

▪ Referral to Mediation

Homeowners that qualify for mediation under the Foreclosure Fairness Act may now be referred to mediation up to 20 days after a notice of trustee sale has been recorded. Prior to the change in the law, once a notice of trustee sale was recorded, a referral to mediation was no longer available.

▪ Time Period for Trustee's Sale

The time period between recording the notice of trustee sale and holding the trustee sale has been extended from 90 days to 120 days. This change applies to owners of owner-occupied residential properties who are entitled under the law to receive a letter from their lender notifying them of pre-foreclosure options.

The above is just a basic summary of several new changes. We always advise homeowners to consult an attorney regarding how these changes will affect their own situation.

How Form 22SS Affects Lender Review of the Short Sale

I get questions regularly from brokers who are concerned about how the terms they outline in Form 22SS will affect how the bank reviews the short sale offer. Contrary to what you might expect, many lenders don't review Form 22SS at all. Banks will look at the contract, but they're not concerned with the terms. In a short sale, the bank alone dictates the terms, from sale price to closing date. They will look at the net proceeds, and also check to see if there is an addendum that outlines concessions that they will not allow, such as having a seller live in the property after the sale and pay rent. Concessions of this type will all but guarantee that the bank will not approve the sale.

While Form 22SS is of little consequence to the lender, it is critically important to your client. Form 22SS clarifies the process and terms that the buyer and seller agree upon in order to complete the sale. That includes:

▪ Whether timelines in the agreement- such as deposit of earnest money or inspection- begin upon mutual acceptance rather than the delivery of lender consent

▪ The number of days a seller has to deliver lender consent to the buyer

▪ The conditions under which the buyer can terminate the contract

It's very important to fully understand the implications of how you fill out the form. For example, in Paragraph 4 TERMINATION BY BUYER, if you check neither of the boxes, the buyer can terminate the contract at any time for any reason. With all these options and variables, Form 22SS can be confusing. If you need assistance with your transaction, we're happy to help. Call Richard Eastern at (206) 612-5541.

Short Sale Myths vs Reality: Closing Time

Many agents and buyers have shied away from short sales because they hear horror stories about them taking 3-6 months to close.

Here's a reality check: In the hundreds of short sales we've closed, the time from mutual acceptance to Lender Consent has averaged 60 days. If someone is inexperienced with short sales, that process can take considerably longer. Short sales require significantly more paperwork than a traditional sale, and if you don’t have a system for collecting and submitting that paperwork to the lender according to their individual requirements, things can really bog down. Many large lenders use a platform called Equator for all aspects of the short sales process, from submitting paperwork to ongoing communication. For those not familiar with Equator, getting up to speed on the software will also prolong the sales process. Most brokers we work with prefer to spend their time building their core business, and leave the short sale negotiating work to short sale specialists with a dedicated staff that handles all the details.

Major Changes Coming to HAFA

As of June 1, there will be significant changes to the HAFA program. The updates will allow a homeowner to remain current on their mortgage, qualify for HAFA, and go through a short sale with less of an impact on their credit.

The major changes include:

▪ The deadline for submitting for HAFA eligibility will be extended a full year, from December 31, 2012 to December 31, 2013.

▪ The removal of occupancy requirements: HAFA until now has required homeowners to have lived in the property within the last 12 months. This requirement is being removed.

▪ The $3,000 relocation incentive will be limited to properties occupied by an owner at the time of the short sale.

▪ Mortgage payments will be allowed to exceed 31% of the homeowner’s gross monthly income. The effect of this will be to allow a homeowner to remain current on her mortgage and still qualify, minimizing the overall potential impact to her credit, and certainly shortening the waiting period to purchase in the future.

▪ Junior lienholders may receive up to a maximum of $8,500, up from $6,000 previously (these are incentives to junior lienholders).

▪ There are also new mandates regarding what the lender can state on the borrower's credit report that, reportedly, will lessen the impact on the borrower's credit rating.

We'll post any new information as we receive it. We have more information about HAFA here.