James R. Samsing's Real Estate Blog

With a majority of sellers in my local markets of Avondale, Goodyear, Glendale, Litchfield Park, and Surprise, Arizona "upside down", this is a question I am often asked. There really is only one answer for families in this situation...a "short sale."

A short sale is an agreement where the lender on the property agrees to accept less than the full balance owed on the mortgage. Short sales are complex transactions that typically take 4-8 weeks to complete and require an experienced (and persistent) Realtor to manage. I have previously written several blogs about how to complete short sales which can be read here: Short Sale Blog

Why should homeowners consider a short sale?

There are a number of reasons to consider a short sale. For example, if you need to sell as the result of a job relocation and cannot afford negative rents on your property, a short sale would be the preferred option. Many homeowners in my local area are stationed at Luke Air Force base in Glendale, AZ and have been forced into doing short sales when they are transferred to another base. Another reason to do a short sale is to save your personal credit. In the past 12-18 months many homeowners have found themselves in the unenviable position of not being able to afford their home due to a job loss, rate adjustment or family emergency. In a normal market, many of these families would be able to refinance or sell their property. But today, the only sensible option is to sell through a short sale.

Is a short sale right for you?

Every homeowner's situation is unique and there is no one right answer to this question. When counseling homeowners I generally focus on 3 key questions:

1. Why do you need to sell? If you don't absolutely need to sell then a short sale should be the last option considered.
2. Are there other options available to you? I generally recommend homeowners consider other options before resorting to a short sale. Refinancing, loan modification and renting the property are generally preferred options to a short sale.
3. What do you plan to do after the short sale is completed? Homeowners need to consider the consequences of a short sale and plan for their future housing needs.    

What are the impacts of a short sale?

There are 3 consequences every home seller should evaluate before making the decision to apply for a short sale.

• What is the impact to your credit rating? Short sales generally appear on a credit report similar to a large charge off. I have seen several that appear with the unusual phrasing "Debt Paid in Full Less Than the Full Amount." It has been my experience that by themselves, short sales generally lower credit scores by 50-100 points. If a homeowner is able to keep their payments current up until the home is sold, they suffer very little in terms of derogatory credit when completing a short sale. For those homeowners who become delinquent on their mortgage, the credit score will be more adversely affected by the late payments than they will by the short sale. Regardless, a short sale on a credit report is substantially better than a foreclosure (or deed in lieu) and allows the home seller to be able to qualify for new mortgage financing in a much shorter period of time. The current minimum waiting period after a foreclosure is 4 years for Fannie Mae & Freddie Mac. Homeowners who are able to maintain a perfect mortgage payment history through a short sale may be able to qualify for a mortgage after only 1 year. And finally, please know that you do not need to be behind on your mortgage payments to qualify for a short sale. I have seen many short sales approved where the homeowner is able to make payments throughout the short sale process. There does, however, need to be a pressing "hardship" for the bank to consider accepting a short payoff.    

• Is there a potential that the unpaid debt could remain as a consumer loan? This is particularly a concern where the homeowner has a 2^nd or "piggy back" mortgage on the property. Many 2^nd mortgages, especially home equity lines of credit, contain provisions that allow the note holder to convert any unpaid mortgage balance into a consumer debt. It is also fairly common for banks to request that a consumer assume some form of future liability as a condition for approving a short sale. As I mentioned before, every homeowner's situation is unique and each seller should evaluate these options individually. But it has been my experience that it rarely makes sense for consumers to accept any deficiency debt to be applied to their personal credit; particularly in states like Arizona which normally prohibits deficiency judgments on owner occupied 1-4 unit residential property. 

• What are the tax consequences? The good news is that the federal government recently created new tax exemptions for homeowners who complete short sales. Generally speaking, homeowners who occupied their properties and did not withdraw substantial equity from their home are eligible. However, it is always advisable that you consult a licensed CPA/Tax Accountant to determine what your potential tax consequences will be before proceeding with a short sale. You don't want to find out months later that you have a $25,000 capital gains tax bill from your short sale.  

Short sales are complicated transactions but can be the best option for struggling homeowners. I hope these comments have assisted those who are considering a short sale.

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Over the course of the last week I've had the chance to read a large number of blogs and Realtor posts regarding short sales. I can't imagine there is another subject with a wider degree of opinion! There is so much information, both good and bad, it is easy to see how consumers and Realtors alike are easily confused. 

I have been a licensed Broker since 1995, but for nearly 20 years I have been principally engaged in the lending side of the business. During that time I have helped hundreds of consumers negotiate short payoffs of private and institutional loans, obtain prepayment penalty waivers, perform rate modifications on existing loans and assist with lien payoff resolutions including IRS tax liens.

Short sales and loan modifications are nothing new.

What has changed is the sheer volume of consumers who are upside down on their homes and the complexity of the mortgages they hold. This has created a tremendous market for short sale "experts" and loan modification "specialists" who offer services to desperate homeowners. And it's created a log jam at loan servicing departments with overwhelmed loss mitigation units processing inordinate numbers of applications. Of course, compounding the problem is this crazy financial services environment where the major servicers (retail banks) are incapable of adequately staffing temporary loss mitigation departments due to their financial condition. Oh, and don't forget the hideous maze of ownership rights to modern mortgages; many of whom have been sliced and diced from mortgage pools into CDOs with no clear owner, and a servicer with no vested interest in the loan itself. Fun Stuff!

Yet in spite of this there are plenty of local Realtors and Loan Modification Companies touting themselves as short sale experts with the ability to make the process "easy," "simple" or "fast."

Uh huh.

Short sale situations are as varied as the stars in the sky. Every consumer's situation is different and there is no single cookie cutter/template that will work for everyone. With that in mind here is my best attempt to provide some general guidance to homeowners or Realtors seeking to sell a home for less than is owed on the mortgage(s).

Bit of Advice #1. Get to the right people the first time around.

Mortgage ownership and servicing rights change hands at an ever more rapid pace. It is important to know WHO owns your mortgage and WHAT department handles short payoff approvals.

If you aren't sure of who owns the mortgage, perform a free search through the MERS (Mortgage Electronic Registration System) website: https://www.mers-servicerid.org/sis/  MERS is a national registration system for mortgage loans and nearly all institutional loans are registered with them.

Once you have determined who the correct servicer/owner of your mortgage is, then you need to identify which department handles short sale approvals. Do not contact the general toll free number listed on a mortgage statement or website unless you want to spend lots of time listening to "sold on hold" messages while being bounced from person to person. I generally "Google" the specific company department I am looking for if I cannot find it in my own rolodex. There are a few free public lists of Loss Mitigation Departments that you might also try. Here is one I recently found: http://iamfacingforeclosure.com/blog/loss-mitigation-phone-numbers/

Once you contact the appropriate Loss Mitigation department make sure to get a detailed list of their requirements, including any company specific forms they require. Do not use a cookie cutter template provided by some 3^rd party.  

Note: If you are dealing with multiple institutional mortgages on a single property then - in my opinion - you are trying to do the impossible. However, you can get short sale approvals done when the 1^st & 2^nd mortgages are owned by the same company. Many lenders now have "Co-Loss Mitigation" Units that workout settlements on multiple loans simultaneously. I recently completed a short sale in Southern California with Wells Fargo by working with a group specifically setup to negotiate on behalf of Wells Fargo Mortgage (1sts) and Wells Fargo Home Equity (2nds).

Bit of Advice #2: Hardship, smardship. You have a sad story, boo hoo hoo. Now what's in it for us?

If you scan the internet you will find hundreds of samples for short sale hardship letters. Too often they focus on the borrower's reasons for needing a short sale and not the bank's reasons for accepting the short payoff. It is ok to spell out hardship but FOCUS ON THE REASONS WHY THE BANK SHOULD ACCEPT YOUR PETITION. The bank only cares about getting the maximum amount of money, in the shortest amount of time. Anything you can point out to that effect should be at the heart of your letter and application.

And be as detailed and accurate as possible. You will need an estimated HUD-1 that is spot on. And if you are looking for a pre-approval, or if you can't get the numbers to be deadly accurate, then make sure to add a minor level of padding to allow yourself some wiggle room with negotiations. Remember that the Loss Mitigator is also looking for some sort of "win" and, as it is with your clients, it's much better to under-promise and over-deliver. Besides, if the deal ends up short to close guess where the extra money is likely going to come from??? It isn't going to be from the lender whose agreed to take tens (or hundreds) of thousands less on their loan!

The key here is that you want to give the Loss Mitigation Officer as many reasons as possible to approve the short sale. Which leads me to my next piece of advice...

Bit of Advice #3. Know who you are dealing with.

Imagine yourself working in a temporary/contract $40,000 year job, sitting in a cubicle farm surrounded by hundreds (if not thousands) of other collection professionals. Your daily work life resembles a Dilbert cartoon with stacks of files on your desk that stretch to the ceiling. Pinned to the punchboards on your cubicle walls are "Matrices" of loss mitigation guidelines which spell out what you must review and what you are permitted to approve. Your phone rings incessantly and you have 14 new voicemail messages, each from some histerical Realtor or homeowner wondering when their application will be approved. You can barely go to the bathroom without someone's permission let alone approve an exception from the "greater of 80% payoff or 100% of bank AVM" rule in your region. Those exceptions require the written approval of a Loss Mitigation Officer II-A and you have only been with the bank 6 months... 

Do you really want to harass this guy? You think he really wants to take your call? Bother him too much and my guess is your short sale application will be placed in the "cylinder filing cabinet."

Instead, be nice. Don't call and harass anyone. Get an e-mail address. Nearly all of the banks have a generic e-mail string like john.doe@bankofamerica.com. Send him polite update requests every few days that he can respond to at his leisure. Keep him apprised of any market conditions regarding the subject property that might hasten his decision. Remind him of important milestones in the purchase contract. Offer to bake him cookies. Whatever it takes (within legal limits) to keep him engaged with you and your file.

Last Bit of Advice (For Realtors Only):  Own the process.  

I live and work in the West Valley of Phoenix and there is hardly a home seller here who is not upside down. I know a lot of Realtors who choose to avoid short sale listings altogether because of the time and energy they take. Others choose to use 3^rd party vendors and leave it up to someone else to do most of the work. While I would never advocate that Realtors spin their wheels and work for free, I do believe that we all have some degree of responsibility to the markets and communities we serve. And remember, the more short sales we close, the fewer foreclosures there will be, the greater the number of qualified buyers that will exist in the future, and the faster we will return to a period of home value appreciation. 

There's my 2 cents. My sympathies to the millions of homeowners in this country who are upside down on their home through no fault of your own. I wish you the best of luck.