Fizzle1979

Mortgage Short Sale

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Anyone heard of this? Is it a good or bad thing? A guy I know is moving and has to sale his house ASAP. He says he is no longer going to make payments on it and he contacted a real estate agent who specializes in short sales. He only lived in the brand new house about 2.5 years. The REA says this will not hurt his FICO score...I find that hard to believe.

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I don't know a lot about it - but one near me was sold on a short sale and there were huge problems with the title transfer. The bank is now trying to evict the new owner even though she has made timely payments. I think the issue is using a title company and agent that understand the short sale. The buyer of this particular home was a RE agent herself and probably thought she knew what she was doing, but messed up bigtime and now the house is padlocked and she can't do anything (was trying to sell it) until the title is sorted out. US Bank still claimed an interest in it and wouldn't recognize the sale.

This is just what I've heard around the 'hood on my walks. FWIW. The seller/debtor, however, in this case, walked away free and clear (although no doubt with damaged FICO since they were behind on payments). I think in order for a lender to consider a short sale, you already have to be pretty behind -- and therefore, the argument that a short sale can't hurt your FICO is a bit flawed. The sale itself might not, but the circumstances leading up to it already have.

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I'm actually have an offer in on a house that was put up as a short sale. I should know Tuesday whether or not the offer has been accepted. If so, I'll be closing on it the 3rd week in August.

I'll agree with LeslieR in that it's a much bigger hassle than buying a home the "normal way". In my situation--which I suspect is pretty common and is probably what happened to the person LeslieR mentioned--the owners refi-ed the home several times in an attempt to stave off the inevitable. Since they defaulted on all these agreements, several banks have a legal claim to the house. And since multiple people at each bank has to sign off on the offer, it takes *forever* to get anything done. On the plus side... if we get it, it's going to be an absolute steal (about 40% less than the value of the defaulted mortgage).

The short sale itself will not hurt the seller's credit since it happens before that dreaded "foreclosure" is stamped on their CR. But the bank (or banks) are going to have to agree to the sale price. And like LeslieR said, it doesn't help with the existing late pays.

A couple of tips that I would recommend:

- Work through the agent that is listing the property if at all possible. They're likely the most familiar with the owner's situation and may have already started to grease the wheels at the bank(s). Additionally, if the price is that good on the property, it's likely to attract multiple offers. Working with the listing agent can be advantageous even though they can't ethically tell you what other parties are bidding.

- Make absolutely certain that you hire your own lawyer to review the paperwork prior to closing.

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I am a Realtor in South Fl. We have an extraordianary number of short sale properties on the market right now (and under contract). I am finding that there is a very, very small percentage of short sales actually getting approved by the mortgage companies. (At this time about 6% of the contracted short sales are actually closing in our area). Most of the time, the lenders have filed foreclosure notices anyway, while the property is being reviewed by the loss mitigation dept. Many times the foreclosure dept has completed the process (and foreclosed) first. The loss mitigation depts in our area take months to respond (12 to 16 weeks is average). :cry: The lenders in our area prefer to foreclose so they can get paid by the mtg ins company, plus have the asset to sell. You would recognize the lenders, Wells Fargo, HSBC, Countrywide (!), Washington Mutual, etc. Remember the lenders only get paid from the MI companies in the event of foreclosure. The MI co's do not pay for Deed in Lieu, or Short Sale transactions.

BTW, the loss mitigation dept will not consider the short sale unless the borrower is not making their payments. Late pays and foreclosure notices certainly make a negative impact on the credit report and FICO score.

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In addition, the lenders cannot attach personal liability to the defaulting borrower if they agree to a short sale. So not only do they want payout from MI, but they want to pursue a deficiency judgment against the borrower. Another good reason for a lender to avoid short sales.

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The big problem for any seller of a short sale property is that all lenders are treating shortsales as if they were a foreclosure, which to me they are not. But, that means at this time that the seller will have to wait 3 years to get an FHA loan and 5 years to get one of the other kind. I don't remember what they are as all I am doing is FHA at this time, just kidding, they are conventional/conforming type loans.

There is one investor that as of 3 months ago was not treating short sales as FC, but the bank won't tell me who they are.

Charles

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Also, I have noticed (regarding personal liablility) - that many of the lenders are requiring the seller to sign a note for a large part of the deficiency (or the entire amount of the deficiency) BEFORE they will approve the short sale officially. So the seller/borrower has to pay the balance. They usually will break it up over 120 mths with no interest - but sometimes these deficiecies are $100k or more. If the lender does not require it (waives the deficiency) then the MI company wants a note signed. Of course, this is why most of the short sales do not close - most sellers do not want (or can not) short sell the home and pay the note

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If the borrower is signing a note for the deficiency, then why would a borrower ever do a short sale? They are shouldering all of the liability and getting nothing in return (ie: either a place to live & to a lesser extent a chance for the property to ultimately appreciate). :confused:

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You got that right!:!:That's why most of the sellers say no and the property goes to foreclosure. This area is seeing only about 6% of the short sale properties close. I strongly suspect the note was waived for the ones that are closing. I also suspect that the reason the lender asks for the note is to force the seller/borrower into saying no so the lender can foreclose (documenting that the seller was not cooperative with the plan) and collect the MI

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Just curious - what about mortgages without PMI? Right now I have "investors" trying to negotiate a short sale with Countrywide on the 1st mortgage and HSBC on the 2nd, but I don't have PMI on either loan. Countrywide has been dragging their feet, been at this since May and they still haven't assigned a "negotiator" to our account. I like to be prepared - what do you think they're up to?

Also, with the new legislation going through right now, what are the chances of qualifying for these new government-backed loans?

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Just curious - what about mortgages without PMI? Right now I have "investors" trying to negotiate a short sale with Countrywide on the 1st mortgage and HSBC on the 2nd, but I don't have PMI on either loan. Countrywide has been dragging their feet, been at this since May and they still haven't assigned a "negotiator" to our account. I like to be prepared - what do you think they're up to?

Also, with the new legislation going through right now, what are the chances of qualifying for these new government-backed loans?

Interestingly - most of the loans originated in the past few years have MI. Even the loans that were not above 80% and even the loans that the seller/borrower does not pay the MI. I found out about two mths ago that most of the lenders put 'internal MI' on the loan when it was sold in the bundled mortgage backed securities! So once you get a negotiator and make arrangements for each loan, then you have to get the MI approval- that is ususally the point where they require the note to be signed before anything is put in writing confirming your agreement. This is where the negotiations ususally fail. The negotiators do not talk about MI approval until everything else in on the table - then suddendly MI appears and needs to approve the deal. That is when the note pops up.

BTW, HSBC does not negotiate in good faith. Had the negotiator say they would take $10k CASH for the 2nd loan (off the HUD as a POC because the first mtg would not allow that much to go to the HSBC 2nd). Could not believe they actually said we checked seller/borrowers cr rep and see they can take cash advances to pay us the 10k! When the seller/borrower accepted it and asked for confirmation in writing, then HSBC said $10k with a note for the difference (not previously required) OR $18k with no note!:evil: That is why I believe the intent was not to accept the sale, but to negotiate until the seller had to say no.

So to answer your question: You have two tough ones - Countrywide takes forever - I have seen six to nine months to respond. Also, Countrywide always requires a higher sales price than the market comps (so your buyer can not get a mortgage based on the comps, the buyer has to have a very, very low LTV or all cash and then why would they pay higher than the comps?) Countrywide has that 'internal MI' so they will ask for the note. But it is usually moot because most buyers will not pay what Countrywide demands. The HSBC 2nd is almost impossible to put together (see above). I would say your chances of getting this deal put together are NONE. The reason they are dragging their feet is to show the MI company market time for the sale/contract so when they foreclose they can collect on the mtg insurance.

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Very interseting. Thank you so much for all the info! :) I am in Florida too so I am going to assume this applies to my market. I have no intention of signing a note, but for argument's sake is it easier for them to collect on a deficiency if you do? Also, how aggressively have they been pursuing deficiency judgements?

And this is just paranoia running wild but is it possible these "investors" are working with the bank to facilitate a short sale that doesn't work out and collect faster on the MI? They keep telling us Countrywide is slow but the easiest to work with and that HSBC can be paid $5k and they'll go away because they basically have an unsecured debt if CW forecloses. Either they have no experience in this or they are lying through their teeth for some reason???

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Very interseting. Thank you so much for all the info! :) I am in Florida too so I am going to assume this applies to my market. I have no intention of signing a note, but for argument's sake is it easier for them to collect on a deficiency if you do? Also, how aggressively have they been pursuing deficiency judgements?

And this is just paranoia running wild but is it possible these "investors" are working with the bank to facilitate a short sale that doesn't work out and collect faster on the MI? They keep telling us Countrywide is slow but the easiest to work with and that HSBC can be paid $5k and they'll go away because they basically have an unsecured debt if CW forecloses. Either they have no experience in this or they are lying through their teeth for some reason???

A lot depends upon when you took out the mortgages and what the value of the house is in relation to the mortgages. For example if you are short $50k on a $300k mtg originated 5 yrs ago is entirely different than $50k short on a $100k mtg originated last year.

I don't know how much experience your investors have, maybe they HOPE it will work out. I don't see how they can work with the bank to collect faster on the MI. What would the investor get?

HSBC is one of the few 2nd's that do not go away with $5k (in my experience). Most of the others (HELOC's) go away with $1k to $3k unless it is a first year default. A first year default is going to foreclosure - they will not accept a short sale. And CW is fairly well known to want more than the current market value, maybe that will change now that BOA owns them.

I don't know if it is any easier to collect on a note than a deficiency judgment - that is a good attny question. But I do not see how or why someone would sign a note for 10 years and lose the house to a short sale unless the note was extremely small, was no interest and you could afford to pay it.

I don't know how agressively they are pursuing the deficiencies - I would think it would be SOP for them to get a judgment and move on to the next one. They have ten years to collect, then they can renew the judgment again for another ten years if it hasn't been paid, accruing interest along the way.

The only good thing about the note is you can negotiate a set amount and it is usually interest free (if it is negotiated that way in the beginning); but the judgment is full of added expenses (default interest, attorney fees, late fees and other penalties).

Do you have an attorney representing you? You should at least discuss your alternatives with a real estate attorney that handles short sale negotiations.

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A little late to this party, but let me add my 2 cents. I have been involved with many short sales (mostly CA and FL) and have learned you need to find out who you are negotiating with first.

Odds are you are just talking to the servicer of the loan. If a bank owns the loan, they will unload it to a good offer. Banks don't want mortgages on their books anymore. 80% of the first lien loans are backed by Fannie and Freddie. It takes 60 days to hear from either them, and you are normally 30 days into it before you can even send it to them.

I get the seller to call the investor directly, to facilitate their contact with the servicer. If there is a second lien or MI company involved, you are lucky to get 6% closed. Those companies need every nickel they can get to survive. They won't bend much. It doesn't help that so many people are putting in ridiculous offers thinking they will steal a property. The last one I closed was a full price offer, that was $50,000 less than market value and $150,000 less than the last sale.

Good luck, you need it on short sales, buyers and sellers.

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Just an update on my sidebar:

It's been two weeks since I put in my offer and it's still wading though the red tape. From what I know, the owners defaulted on a mortgage worth around $400k plus a second one worth about $130k. The house is being foreclosed on with the redemption period still several months away (total of 6 months in Michigan). The house was listed at $350k, then $275k, and then finally $250k. The $250k list attracted two or three bids, including mine. Because of the other bids and the fact that it was still a good deal, I actually bid over list at $264k. My understanding is that the primary lien holder has accepted the offer and is trying to convince the junior lien holder to accept the $20k bone being thrown their way.

My written offer expired last week, so I'm free to walk away at any time and I'm getting to that point. It has been utterly nerve wracking being continually told: "We should hear something tomorrow/next Thurs/next week" again and again. Not to mention the multiple colonoscopies I've had to endure from mortgage lenders.

Tomorrow I am looking at another house 4-5 doors down from the short sale. They just reduced their list price from $289k to $250k as well.

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Tomorrow I am looking at another house 4-5 doors down from the short sale. They just reduced their list price from $289k to $250k as well.

Rhetorical question that you don't have to answer publicly...but where the heck are you in MI??!! I just visited family outside of Cleveland and Pittsburgh, and sadly, $250K will buy you a very nice, pretty large home.

Here in Orange County (CA), a $289K foreclosure is probably unlivable (just as sad as it getting you something palatial in the rust belt).

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I work in what's been called the most expensive city in the Midwest: Ann Arbor. This particular house is a slight drive away in a somewhat rural 'burb. It's 4 bed, 2.1 bath, and just under 3k sq. ft.

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From Goose "Odds are you are just talking to the servicer of the loan. If a bank owns the loan, they will unload it to a good offer. Banks don't want mortgages on their books anymore. 80% of the first lien loans are backed by Fannie and Freddie. It takes 60 days to hear from either them, and you are normally 30 days into it before you can even send it to them."

Did you see the release from Freddie on July 31? Now, as of Aug 1, 2008 Freddie will pay the servicer a larger incentive to complete the short sale (raising the incentive from $1100 to $2200 to the servicer). Prior to Aug 1, 2008 Freddie paid an incentive to the servicer to foreclose quickly and not complete the short sale. I hope this works to get the servicers to accept the reasonable short sale offers.

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I didn't see that Denita, thanks! Now I wish Fannie would do the same. I talked to the servicer's negotiator, and they told me they were waiting to hear from Fannie. I had the owner (seller) call Fannie directly to tell them they were not getting any response from their servicer, and give them a sob story. A week later and they are still waiting for the call back from Fannie - same boat as the servicer.

Side note - Freddie almost went out of business today. They better speed up their short sales to clean up their books.

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Freddie almost went out of business today.
Freddie can't go out of business. Their bondholders are backed by taxpayers now.

How Freddie is supposed to work:

"Here's how it all works for residential single-family mortgages:

  • A homeowner sends the monthly payment to the lender or a mortgage servicer that manages the payments.
  • The servicer keeps a small fee for managing the borrowers' payments and sends the rest of the monthly payment to Freddie Mac.
  • Freddie Mac passes through the remainder of the mortgage payment to investors who hold our mortgage securities."

But that's not how it went down. In the midst of an unprecedented housing bubble they decided to hold mortgage debt. Now that much of it is worthless, they have to write it down. An enormous OOPS that creates a bailout scenario for you & I.

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I guess I shouldn't have said "gone out of business". They will just no longer be traded.

The government will step in and take over this mis-managed company. If the tax payers are shouldering the risk right now, we should reap the rewards when the housing market turns.

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I have a friend househunting this week in Saint George, UT and she can't even get an agent to show her a short sale - and there are plenty in the St. George MLS.

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The government will step in and take over this mis-managed company.
FRE and FME are bizarre quasi-private/public entities as it is. They are chartered by the US gov't already and are tax-exempt. In other words, they are creations of the government in the first place and there is no need for them to step in.

They were a bad idea in theory and terrible ideas in practice. Best thing that can happen is they disappear. The markets will fund mortgages just not at the ridiculously low levels of return that we are used to in the past few years. That's part of what caused the housing frenzy.

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It's coming. I will soon be doing covered bond loans. They will be going to people that do qualify.

A short sale I am working on now, was a 95% Pay Option Arm with reduced documentation. The guy trying to buy it is putting 20% down and can prove his income and assets. Sometimes the system works.

My first mortgage was only 5% down, with 2.5% assistance. The second was 10% down and still ended upside down when I sold it a year ago.

The next one will be 20% down, but I need to decide where to live first.

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