When a lender sells a property for less than the full amount owed on the mortgage –are notorious for being long and painful. Some Realtors even refuse to touch short sales because of the uncertainty involved. In spite of the growing backlog of distressed homes, banks have been taking up to several months to respond to short sale offers, often because they lack the staffing and know-how to process such sales faster. That is leaving many homeowners and their real estate agents in an interminable waiting game.
But homeowners who are underwater and struggling to offload their homes through a short sale may get relief soon through Home Affordable Foreclosure Alternatives (HAFA). Part of the government’s Making Home Affordable program, HAFA is designed to incentivize borrowers and lenders to avoid foreclosure. It takes effect April 5, lasts through Dec. 31, 2012, and is aimed at homeowners who are eligible for a loan modification but unable to complete the process.
What Banks are Doing
Already, some banks appear to be working to facilitate the short-sale process, perhaps in anticipation of HAFA. A JP Morgan Chase spokesman says the bank doubled its short-sale staff during 2009. And in response to the rise in volume, a Bank of America spokeswoman says the bank “increased the number of associates working in short sales to keep in line with the increased demand for short sales.”
Indeed, short sales jumped to 15.9% of home purchase transactions in January, from 12.4% in November, according to a monthly survey by research firm Campbell Surveys and Inside Mortgage Funding, a trade publication. Just in the last 30 to 45 days, some banks have significantly increased their staff handling short sales and the amount of short sales they’re approving, says Rob Lattas, a real estate attorney in Chicago who handles short sales. Typically, it’s taken anywhere from four to six months – and sometimes more – to complete one of these transactions. “We’re seeing short sales now come out between 30 and 60 days, which is crazy. We’re seeing banks being more cooperative,” Lattas says.
The Realtor’s Perspective
Realtors are echoing that sentiment. Jackie Hillman, a realtor with ReMax Premier Group in Tampa, Fla., says the short-sale transactions she handles are getting a bit easier, in part because lenders are more proactive. Last week Hillman sent a short sale listing agreement a client’s lender, usually the first step in the process. It usually takes a few days for the lender to even acknowledge they received the agreement. “But they called me the very next day and assigned me to a negotiator, which normally takes a couple of weeks,” she says.
“As soon as you tell [the bank] your client is interested in a short sale, they want to get the ball rolling. They realize they can’t make people wait around for six months – the owners might walk away,” Hillman says.
HAFA Changes
Under the HAFA guidelines, borrowers receive pre-approved short-sale terms before listing the property (including the minimum acceptable net proceeds). Before, sellers submitted a buyer’s offer without knowing if the lender would accept the amount. “Now we will know what the bank’s threshold is before we go through this whole rigmarole,” says Lattas.
The loan servicer must respond within 30 days of a homeowner requesting a short sale. And they must respond within 10 days of receiving a sale contract as to whether they’ll approve or deny it.
The new rules also require the lender to forgive the seller’s mortgage debt (on their first mortgage). This is a promise that the bank will not pursue the seller for the outstanding balance on the mortgage.
And financial incentives include $1,500 for the borrower for relocation assistance and $1,000 for servicers to cover administrative and processing costs.
Real estate professionals are hopeful the new guidelines and incentives will make short sales easier to accomplish. “If the HAFA guidelines are actually followed, it’s a great thing for the short-sale marketplace. The biggest frustration I have as attorney is clients saying ‘I’m still waiting to hear from the bank.’ Now banks have 10 business days to say whether they’ll approve or deny the sale,” Lattas says.
Obstacles Remain
Of course, even with the new regulations, things may still get held up.
One possible obstacle: If the current buyer for a short sale decides to terminate the purchase – say, because it’s taking too long – often the real estate agent involved in the sale ends up back at square one. They have to re-submit the short-sale package to the lender and are given another negotiator (the person who negotiates the sale on behalf of the lender) – essentially forcing them to start all over again, says Stephanie Fix, a realtor with ReMax Professionals in Denver.
Another potential snag involves second-lien holders. Typically, short sales are made additionally complicated when sellers have more than one loan on their property. HAFA requires second-lien mortgage holders to drop financial claims against borrowers exceeding $3,000 (they are often owed many times more than that).
These lenders must agree to release the lien for the transaction to close. But even with the $3,000 limit, they may hold the deal ransom and demand more from the first-lien holder or seller in exchange for releasing their claims. “A lot of these short sale deals have fallen through because of the second lien,” says Fix. “It will be interesting to see how the banks – the ones participating in HAMP – will follow these guidelines.”