What is Happening with Short Sales and Foreclosure Sales

(My comments will be in bolded text).

This is a good explanation about how the rules for Short Sales and Foreclosure sales are both driven by the Loan Servicing Agreement on the original loan. 

Several different companies may be involved with a loan.

When you get a loan to buy a property, the loan is originated by one company. That company may keep the loan in their own portfolio, or (more likely) re-sell the loan to another investment company. 

Then, the loan may be serviced (payments collected, etc.) by the originating company, or the investment company, which bought the loan, or by another company, which just does loan servicing.

Short Sales

So, when there is a short sale situation (there is a pending sale for less than the loan amount) the loan servicing company may be able to make the deal to sell for the loan amount, may be prohibited from making any such deal, or may be able to make the deal only with the investment company's approval. If the loan has been resold several times or packaged with other loans, that becomes almost impossible.  

Foreclosure sales

Traditionally, the minimum acceptable bid has usually been the existing loan amount. If that amount is not equaled or surpassed, the property will go back to the investor company, which holds the loan. They will then list it for sale with a Realtor.

Recently however, if a property is not habitable, due to damage, etc., that means it is almost impossible to get a new loan to buy it, so since it will only attract an all-cash offer anyway, some properties have been selling for less than the current loan amount at the foreclosure sale.

In either a Short Sale or Foreclosure Sale, there will be a "Loan Servicing Agreement" telling the company collecting the loan payments how to collect payments, what to do if payments are late or the borrower does not pay and if they can make a deal to sell at less than the loan amount.

 (From the Bryan Ellis News)

The Real Truth Of Why Short Sales Are So Hard To Complete

I had a meeting this week in Las Vegas with some high net worth investors and a colleague of mine who runs a large real estate brokerage that focuses on asset management and foreclosure disposition for very large mortgage lending clients.  He was explaining the process of foreclosure auctions and mentioned that the vast majority of properties that go to auction have a starting bid that matches the amount of the debt against the property.  Since most foreclosures are tremendously over-leveraged, the typical auction result is the return of the property to the lender.  Makes sense… nobody would want a property with massive negative equity to begin with.

But the really interesting part of this discussion came when he was asked why some lenders will drop their starting bid price to a much lower level, potentially even creating attractive deals.  His answer shed some light on the difficulty with short sales, and I thought I’d share this info with you here.

He explained that most mortgages are “serviced” by a company separate from the person or entity that originally funded the loan.  These “servicers” are governed by a “servicing agreement” that specifies things like how to collect payments, what to do when payments are late, how are foreclosures handled, and many other things, including:  How to handle the bidding when a property goes to foreclosure auction.

As it turns out, most servicing agreements stipulate that the servicer has to try to sell the property at auction for the full amount of the debt.  As a result, there are very few real “deals” at foreclosure auctions.  But some of the servicing agreements are more realistic and allow the servicer to base the starting bid pricing on the current market value minus the costs of foreclosures, repairs, holding, etc.  It’s on these properties that a good deal can sometimes be found at foreclosure auctions.

And all of this leads us back to short sales.  The reason that my colleague said that short sales are so hard to complete is because most of the servicing agreements that exist today do not address the issue of short sales and how they can be handled.  As a result, most short sales have to be evaluated on an individual basis and may even require the direct approval of the original lender.  And if the loan servicing agreement on the loan that you are trying to short sale does not have specific guidance concerning short sale criteria, you’ll be fighting an uphill battle to get it approved, regardless of how well the transaction is handled on your end.