The U.S. Treasury soon will release more details in its plan to encourage banks to allow distressed homeowners to sell their homes for less than they owe in a short sale.
Traditionally, banks have been more willing to foreclose on a home than to let its owner sell it for less and absolve the borrower from paying the difference. But last May, in its efforts to prevent foreclosures, the federal government announced procedures designed to make short sales more palatable to lenders, streamlining the process and offering some monetary sweeteners for their trouble.
Ideally the government would prefer that homeowners and lenders work together to modify mortgages to less expensive and/or longer terms so the borrower can stay in the home. But when that process fails, the government is encouraging two other potential outcomes short of foreclosing on the house--short sales and deeds-in-lieu, where the borrower voluntarily hands over the deed to the property to the lender.
Both of those have less devastating outcomes than foreclosures, which have a heavy impact on borrowers’ credit and can be costly for lenders to litigate, market, and--finally--sell. Still, short sales and deeds-in-lieu transactions can be incredibly complicated, requiring lenders, loan servicers, home owners and potential buyers all to coordinate and agree on the arrangement.
Under the federal guidelines encouraging short sales, borrowers have at least 90 days to market and sell the property, with extra time allowed in some markets. The marketing process can run at the same time as the foreclosure, but the foreclosure can’t be completed during the marketing time.
To make that process simpler and smoother, the government has proposed a standard process with minimum time frames and standardized documentation. For the trouble, servicers may receive up to $1,000 for every successfully completed short sale or deed-in-lieu transaction from the Treasury. Borrowers can get up to $1,500 to help them relocate. And lenders who may hold second loans on the properties, who are often the sticking point in short sales, would get as much as $1,000.
Is all that enough to overcome the complexity of it all? It's hard to say.
Short sales did increase by 45% in the second quarter, but, since the program didn’t start until May, it’s doubtful the program change was the cause.
“It’s hard to say if that (the extra cash) is really enough to make that much of a difference,” said Keith Gumbinger of mortgage research firm HSH Associates. “Maybe the servicers are saying, ‘Give me some walking around money so I can pay somebody to handle the paperwork.’”
Businesses have emerged to do just that.
Scott D. Coloney founded Foreclosure Response Team (FRT) out of Fort Lauderdale a year and a half ago with the thought that the growing foreclosures would spur a business opportunity. He’s commissioned a computer system designed to expedite short sales by helping distressed sellers and their real estate agents connect to lenders and loan servicers.
“We are a basically bridging the gap between the borrower and the servicer,” said Coloney, who is just now beginning to get business.
Real estate agents representing borrowers looking to do a short sale can contact Coloney's company. FRT then puts one of its loss mitigation experts and the title company on the case of determining the home’s value and communicating with the loan servicer. In return, the real estate agent agrees to give the Fort Lauderdale-based firm 20% of his or her commission and the home seller forks over a $600 fee at closing. But the company only gets paid if the short sale occurs.
FRT now operates in 18 states, with its core business in Florida, Maryland, Virginia, the District of Columbia, and Michigan. Coloney expects to add California shortly.
Some lenders and their servicers are more cooperative than others, according to Coloney, who is gathering stories of rejected short sale transactions and the final foreclosure auction price of the home in question. He’s hoping that might convince lenders to favor short sales.
Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.
Learn more about markets featured in this article: Miami, FL.
