ShortStopping Short Sales to Stop the Bleeding?

In the years (decades) I’ve been choreographing preforeclosure short sale transactions, I’ve always asked the applicant to provide copies of original documents, and make additional copies for themselves since lenders made a habit of losing papers. Sometimes accidentally, other-times intentionally.  Having worked in a prototypical loss mitigation arm of the nation’s then largest loan servicer, I knew the drill, and marching orders came from the department leader who took orders from the division leaders who took orders from….. and so on up the food chain.

The surest way for a manager to clear a department’s backlog is to deny partially complete workout applications and then send the loans to the foreclosure department… making them someone else’s problem. “By 5:00, any workouts not formally approved… send the borrowers a letter of rejection, refer the file to foreclosure, and then close the file.  See you all on Monday!” 

In today’s loss mitigation environment, its not much different.  Except the loan servicers’ objective, in my opinion,  isn’t so much about clearing a department’s workload… it is more about deferring the realization/monetization of loss.  An under-performing or non performing loan is still an asset on the books… but once a short sale is approved, the asset is exposed for what it is and real loss is incurred. For many lenders who seek investors.. maintaining the appearance of solvency is crucial in its quest for financing. 

Comprehensive applications with supportive documentation are conveniently lost. (Irrespective of the loss mit’s instructions to FAX the application, I usually send a copy or copies of the workout/short sale application via US Priority Mail, Certified, return receipt requested). 

Servicers’ customer service call centers can be voice mail jail if the lender hasn’t prioritized the account. Once you key in the loan account number… the “prison” keeps you in a holding cell, and either directs you to an overflowing voice mail box,  or a human voice who states he or she cannot speak with you and then asks you submit a LOA for the third or fourth time.  “FAX it, and then call back in 72 hours….”

How many of us trying to speak with the loan servicer’s designated loss mit rep have been placed on hold for far too long only to be disconnected?  Coincidence?  Nope.  Design.  

When the lender is ready to proceed… be ready.  That’s when you’ll be glad you made extra copies of everything.

ShortSales:  An Ethical Approach

Every upside down scenario doesn’t indicate short sale, and not all loans qualify as having short sale feasibility.  At least three key elements must be present before a short sale may even be considered.

1. The specific loan itself must be eligible for a short sale workout as imposed by servicing criteria.  If deemed eligible, all servicing criteria must be met.  Some criteria  includes loan default, or mortgage foreclosure.  The property  must be marketed for sale at a defendable, fair market value. The property must be sold in its as-is condition with no seller concessions, and the seller can’t receive a dime from the transaction.  Typically, the lender sets a  minimum net recovery in the form of a percentage of the confirmed, as-is value.  Anything impacting their net recovery (real estate commissions, closing costs, liens, etc.) as evidenced on the HUD1 will influence the lender’s decision to accept or reject a short sale proposal.
2. There must be full documentation of long term, financial hardship, and the inability to pay the mortgage, cure the default, or sell without special lender consideration  & concession, and
3. The lender must view the loan as at risk of loss.    

If all these elements are in place…. then we can proceed with the construct of a formal request for short sale consideration.           

ForeclosureFocusUSA

July 31, 2007

A Burdensome Mortgage

By JAY ROMANO, The New York Times

Q. We are buying a new home from a builder who is providing the financing, but we have not sold our current home yet. We believe our asking price is less than what the current home is worth, but we still cannot sell it. Is there any way we can get out from under the mortgage on the current home? Someone mentioned a deed in lieu of foreclosure. How exactly does this work? We have run out of options.

A. Steven Einig, a Manhattan lawyer who specializes in foreclosures, said that a deed in lieu of foreclosure is a negotiated settlement between a lender and a borrower. Basically, Mr. Einig said, when a borrower is in default on a mortgage, the lender has two options: to foreclose against the property – which can be a lengthy and expensive procedure – or accept a deed in lieu of foreclosure in which the borrower voluntarily transfers ownership of the property to the lender in exchange for forgiveness of the balance due on the mortgage.

Typically, Mr. Einig said, unless a borrower is in default - that is, he is already behind in his payments - there is no incentive for the lender to consider a deed in lieu of foreclosure. At the same time, however, once the borrower starts missing payments, late charges begin to accrue and, under most mortgage documents, the borrower can be held responsible for any legal fees incurred by the lender. If the borrower goes into default, Mr. Einig said, there is no guarantee that the lender will consent to a deed in lieu of foreclosure, but could proceed with a foreclosure instead, which would leave the borrower with no house and with a judgment for the balance of the loan not paid off by the foreclosure sale, as well as for the costs of the foreclosure.

There are two other potential problems to consider. First, it is possible that in the documents under which the builder is providing the financing for the new home, the buyer is making a representation that he is not in default of any existing loans. If such a default occurs, it is possible that the deal on the new home could fall through. And secondly, according to David Petrovich, executive director of the Society for the Preservation of Continued Home Ownership, a counseling organization in Oakhurst, N.J., it is possible that any forgiveness of debt on the original mortgage will be considered taxable income on both the federal and state level.

With growing frequency in preforeclosure short sale scenarios, its simply not enough to present a compelling, full market value, cash, as-is purchase offer to a foreclosing lender in hopes it will release its security interest and accept less than is due.

Sometimes a properly constructed, well supported, and timely short sale proposal is rejected, even though a short sale appears to be in all parties’ best financial interest. Why?  There are other, untold forces at play.

Criteria imposed by the Investors (owners of the mortgage debt) which employ the loan servicers who are reponsible for collection activities including preforeclosure short sale workouts and forced foreclosure sales have specific business objectives which may not appear to make short term financial sense to us.

Internal investment criteria used to consider short sale workouts include, but are not limited to derivitive relationships and their impact on earnings, taxation, and position in the marketplace.

Loan Servicer:  “We have considered your request for short sale. The Investor says we can only accept the full amount due.”

Agent:  “But the fair market value is less than what is owed.  This is a great offer!  You’ll never net this much if this property is sold at Sheriff’s Sale or Trustee’s Sale!”

Loan Servicer:  “That may be, but we can only accept payment in full.” 

Agent:  “But you stated you woulkd consider a short sale as an alternative to foreclosure.”

Loan Servicer: “Yes, that’s true.  We will consider a short sale.”

Agent: “I have complied with all the criteria listed in your application.  A fair market value listing agreement.  An MLS activity history.  A contingency free Contract of Sale.  A Preliminary HUD1.  Full financial disclosures.  A letter of hardship.  Everything.  You’ve done a BPO and confirmed the asking price is market value.”

Loan Servicer:  ”Yes.  Thank you for all your hard work.  I can only accept the full amount due.”

Even though your transaction may fail,  you can be sure your presentation (market data, borrowers’ hardship, etc.) will be used by the loan servicer when it seeks to justify losses sustained by its Clients.

 An Ethical Approach (to preforeclosure shortsales)

I did my first short sale in 1985 or 1986, and have been involved since then in preforeclosure shorts from all sides of the closing table: as buyer, as seller, as real estate agent, and as loss mitigation asset manager for the foreclosing mortgagee. 

I’ve spent years reviewing failed short sale attempts (my own, early attempts, included which I call Trial by Education)), and repairing botched but salvageable short sale attempts for brokers, brokers’ agents, speculative investors, and private homeowners. (not all botched attempts can be salvaged, and not all well constructed attempts are successful)

In my experience, the most common cause for failure can be traced back to inadequate prequalification of the short sale candidate, and/or the inadequate foundation of the short sale construct.

When building a house, like a short sale, there is a process to follow.  You don’t start by building the roof…. you must first build a stable foundation.  If the foundation is built poorly, or the construction techniques shoddy, the house will not stand.  And you don’t run the electrical wiring or the plumbing AFTER the drywall is up.   There is an order to follow. 

When on a listing appointment the agent first suspects a preforeclosure scenario, and quite possibly an indicated short sale scenario… it is essential to provide the homeowner accurate information and quickly displace and reign in the seller’s unrealistic expectations with cold hard facts. The agent’s task is to tell the seller what it needs to hear, not necessarily what it wants to hear.  At this critical moment, the seller will hear what it wants to hear, and remember what it wants to remember. So great care and attention must be paid to detail, both in the collection of information from the seller, and in providing information to the seller. 

Builders who use faulty construction techniques don’t have many happy customers.  Neither do real estate agents who fail to lay the proper foundation, use faulty techniques, and botch sellers’ chances to escape foreclosure via short sale.

An agent who answers a seller’s foreclosure or short sale related question with, “I don’t know, but I’ll find out” is doing a greater service to all concerned than if he or she gave an incomplete or inaccurate response.

Recently, an agent handed me a file which contained a listing she had taken the day before. The seller owed about $50,000 more than the property was worth.  Not only had the agent listed the property for sale about $25,000 too high for the market, there was a Sheriff’s Sale scheduled within a few weeks. Yet, she gave the seller hope (false hope) a short sale could be worked out within that small window of time.

It’s hard to unring the bell.

 Oh, and not every upside down situation indicates short sale feasibility.

• An Ethical Approach (to preforeclosure shortsales)