Insider Short Sales Secrets Revealed

Why learn about short sales?
There are a lot of short sales on the market right now and more coming. Lenders are being pressured by the federal government to pursue loan modifications and short sales instead of foreclosures.

If you are a homeowner, who owes more on your loan than your home is worth, if you want to sell, it will need to be a short sale.

Advantages of a short sale instead of a foreclosure for the homeowner:
• Provides some control over the process. (Not a lot more, but some.)
• May provide some financial incentive to the owner. (Rarely, but it does happen.)
• Preserves personal dignity. (No public posting of foreclosure sale notice.)
• Less of a hit to your credit score.
• Less time before your can buy a new home.
• The short payoff can help preserve the neighborhood market values.

Advantages of a short sale for a buyer:
• More homes available.
• Less competition (many Realtors and buyers will avoid short sales.)
• Possible lower price than for a private sale.

Insider info:
I recently attended 2 events with insiders on both sides of the short sale scene: one event featured a lender's representative and the other event had an title company escrow/negotiator representative, who represents homeowner/sellers. They confirmed some things I knew from previous events and also revealed some new information.

First some definitions for the purposes of this article:
Short sale: a sale of a property is made for less than the current loan balance. For example, if there is a loan on a property for $200,000, but the current market value and offer to purchase the property is $150,000, the payoff to the lender will be $50,000 less than the loan amount (minus also all costs of sale.)

Homeowner/seller: person on the title (legal record) as the owner.

Loan originator: the company who originally signs-up the home-owner for a loan. This can be a mortgage broker, who could represent many different lenders, or a lender, such as Well Fargo Bank.

Loan servicer: This is a company, who services the loan. They collect payments, etc. This may be the loan originator, the original lender, or another company.

The lender/investor: This is a company or individual, who ends up "holding the paper" – the owner of the mortgage. This might be the original lender, but most lenders resell their loans to another investor, a government agency, or another financial institution such as a securities firm. Loans can also be packaged with other loans to create a "securitization" of the loan and that security can be resold several times.

The owner’s representative: The processing of the short sale may be long and difficult.
• It is almost impossible for an owner to do it and even Realtors do not have the specialized knowledge and time to be consistently successful.
• The listing Realtor may have someone in their office, who can do it (we do.)
• Many title companies now have specialists, who can handle the processing, but they cannot negotiate with the lender/investor.
• A third party negotiator or another representative may both process the paperwork and negotiate with the servicer.



The short sale process: (in brief)
1. The property is listed with a Realtor for sale by the owner.
2. An offer to purchase is made by a buyer and is accepted by the owner.
3. The offer is submitted to the servicer for approval, along with a complete file of information about the owner, the reasons they qualify for the short sale, etc.
4. The servicer assigns a negotiator to evaluate the file and approve it or not.
5. If necessary, the servicer submits the deal to the lender/investor for approval
6. There may be more negotiations necessary to get final approval

Whew! Sorry, for all of the detail, but you have to know the players to understand the game.


What you should know about the short sale process.

Servicer/lender policies and procedures are constantly changing, their personnel are constantly changing and lender/investor rules are generally unknowable, all making for typically an incredibly frustrating processes.

According to the lender's representative I heard speak, (let’s call him by the code name “Mr. L,” he has the best and most successful processing and closing available. He may just be right, but unfortunately he only manages the short sales for one lender's portfolio loans, (the loans they have kept in their own account.) He does not deal with their investor loans (loans they service, but have sold to another investor.) Only about 10% of the loans they service are their own portfolio loans.

As described by the title company owner’s representative, other servicer/lenders are not as good, some much, much worse. Here are some comparisons.

Insider info:
L’s company’s internal calculation is that the lender/investor will recover 10% more money approving a typical short sale instead of foreclosing on a property.

So, why is it so hard to get a short sale approved? (Keep reading and you will learn some possible reasons.)


The journey of the short sale file:
1. Your representative submits a package of information (a file) to the lender servicer’s Set-up person:
• L’s lender representative provides local processing and approvals. Most big lenders only have remote processing centers in far away states, usually staffed with people, who may have just been hired and have little knowledge of what is going on.
• They make sure the file is complete.
• If the file is incomplete, they may just shred it. It might be missing only one piece of information (maybe some information that no one has previously required) but it will be too difficult to keep track of and update. So, they will ask for a new complete package.
• The processor person may be new or poorly trained and mess up the process.
• Your file may be lost….several times….during the process. This is common.
• L’s response time at any stage of the process is 7 to 10 business days. (The industry average is more like 2-3 weeks.)

When complete, your file goes to -

2. The Negotiator:
• Processing: They may have several hundred files and take several weeks to get to yours. Then, it gets maybe 5 minutes of review.
o By the time the file is considered, the docs may be too dated. They will request new docs and your file goes to the end of the line. (This can happen more than once.)
o If the file is incomplete (by their latest standards which may be new and unknown) you will get a request for more info and your file goes to the end of the line.
o If there are questions, they may ask for clarification or may just trash the file. (Too much work.)

• Valuation/negotiation:
o Review of the purchase offer: the lender/investor want the highest possible net return and the best chance of closing the deal. So sometimes they will accept an all-cash offer, which is lower than an offer requiring financing.
• The lender/investor will have someone do a valuation of the property to determine if the purchase offer they have is reasonable given the current market.
o May use out-of-town appraiser or Realtor who does not know the local market.
o May do a desktop appraisal (just look at computer reports) or a drive by. Rarely will they find out about interior condition or possible anomalies.
o Valuations can be way off.

Completed package will be submitted to the lender/investor.

3. Investor evaluation:
• The servicer will not reveal the investor’s requirements. It may be that you go through the entire process and the investor will not allow a short sale.
• The investor may have mortgage insurance, which will cover their loss in the case of a foreclosure, but not a short sale, so they will deny a short sale, foreclose on the property and put it on the market, sometimes even at a lower price point than the short sale offer price!
• Sometimes, it will take them a long time to approve the deal. They may only meet to consider files quarterly.
• If there is a second loan or equity line on the property
o Lender/investors in first position know the second loan is not worth anything if the property is sold at foreclosure, but the second lender may demand a payoff anyway to approve the short sale.
o L says he will pay 10 to 15% to a second mortgage holder. Others will typically pay nothing toward a second mortgage, but may pay something depending upon the circumstances.)
o Sometimes this stalemate will prevent the short sale from being approved and the property will end up going to foreclosure.
• The bottom line for the lender/investor is how will they recover the most money?
Loan modification, short sale, foreclosure? That is the option they will take.

The closing: completion of the sales transaction
• L’s average timing from application to closing is 37 business days. (The typical short sale takes 3-4 months and can often take over a year. (If it takes that long, in 4 out of 5 cases the original buyer is long gone and you have to hope to have a back-up offer in hand.)
• Deficiency and other issues: This is a big deal and a more complicated subject than we can explain in detail here, but here are some basics.
o Your short sale can be accepted, but with the provision that the owner will contribute a promissory note for the lender’s loss.
o If the loan is not the original purchase money loan, the lender can reserve the right to come after the owner for any amount that they are short from their loan balance.
o If there is a deficiency provision in your short sale agreement, for example, if your home sells for $50,000 less than the mortgage balance, they can present you with a bill for the $50,000 sometime in the future. They may even sell the note to an aggressive collection agency to come after you. Many owners will not sign that deal.
• Sometimes, the lender may have a quota and just accept a certain number closes per month. If that is so, you have to wait your turn. That’s it.
• L says he closes 70% of his short sales. The industry average is 36%.
So, short sales can be done, but up until now, it has been a difficult process most of the time.

However, there is some additional hope. The new government HAFA program has mandated more standardized processes and procedures for short sales. Time will tell if the lenders manage to implement them.