RISMEDIA, September 26, 2009-(MCT)-A few years ago, few people in the housing market had ever heard of a short sale. Mention the term today and people, whether they are homeowners or real estate agents, just roll their eyes.The practice, which involves selling a property for less than the amount owed on the mortgage, has grown in popularity as an exit strategy for financially strapped homeowners because it doesn't ding a credit report as deeply as a foreclosure. But because the transactions have to be approved by first and second lien holders, they are languishing. Some real estate agents try to steer clear of them entirely and even specify in their listings that a property is not a short sale.
In mid-May, Treasury Secretary Tim Geithner announced plans to streamline the process by offering financial incentives to mortgage servicers and investors that accept short sales, much in the same way that they are rewarded for refinancing or modifying troubled mortgages. Four months later, homeowners, real estate agents and lenders are still waiting for specific details of how the plan would work. A Treasury Department spokeswoman said an update on the program is expected in a few weeks.
Meanwhile, homeowners like Dallas O'Day are in limbo. O'Day, a Chicago attorney, and his family relocated from California in June 2004 and bought a Mediterranean-style home in Chicago's Beverly neighborhood for $395,000. They rewired the house, stripped and refinished the wood floors and the woodwork, and did other work to restore its charm. Last year, personal circumstances prompted them to list the home for sale just as the housing industry's meltdown was picking up steam. With no takers and no longer even expecting to break even on his investment, O'Day relisted the 2,700-square-foot home in January as a short sale.
Four months and three price reductions brought the house down to $384,900, at which point a potential buyer made an offer in late May. O'Day accepted it and submitted the paperwork to the lenders holding first and second mortgages on the home. He has yet to receive a response. Meanwhile, the family has moved into an apartment, the refrigerator has broken in the home and there's evidence of mold in the basement. "The only thing we keep hearing is they keep wanting current payroll stubs, bank statements and taxes," said O'Day's real estate agent, Pam Decker at Prudential Biros Real Estate in Evergreen Park, Ill.
"What has astonished me is that in the presence of one of the softest housing markets I can remember, we're hitting up on four months and they've just had a person assigned to look at it, that they would move at such a glacial pace," O'Day said. "My expectation is I'll be renting until whatever blemish is gone. I've just accepted the fact that at some point it'll be foreclosed upon because I just don't think the banks will pull it together. I feel like I've done everything I can do."
During the second quarter, 14% of all home sales were short sales and they were made primarily to first-time buyers who may have more flexibility to deal with the long wait times, according to a survey by Campbell Communications. The sales volume could be much greater. Two out of three short sales never close. "In general, you have to have three offers for every completed short sale," said survey designer Thomas Popik. "The first offer, the buyer walks before they get a yes or no. On the second offer they walk a good part of the time. The third offer is the charm because it's been in process long enough at the lender that the lender knows they want to do this.
"Home buyers are now putting in half a dozen verbal offers, hoping that on one of them the lender will say yes. What this is doing is bogging down the approval process at the mortgage servicers. It's just gotten to the point that everyone has started engaging in unproductive behavior. It's a vicious cycle."
The process of getting a short sale approved involves a packet of documents that includes bank statements, tax returns, letters explaining any other sources of income and a hardship letter explaining why a short sale is being sought. After the packet is submitted to a mortgage servicer, it has to be entered into the system, a person has to be assigned to it, and an appraisal has to be ordered for the property. On average, it took loan servicers 91/2 weeks to respond to a short sale offer, Campbell's survey found.
"You've got to stay on top of these banks," said James Orrico, a real estate agent at Professional Residential Brokerage LLC in Oak Brook, Ill. "I call on my files every day. If you don't stay on top of them, you'll lose it."
A number of factors are contributing to the delay. Lenders say their top priority is keeping people in their homes, and their own and the government's loan modification programs are taking the bulk of their resources. "The modification program was just like an atom bomb that dropped on servicers," said Matt McCabe of National Short Sale Center, a company that acts as a negotiator between borrowers and mortgage lenders. "They had a really hard time reacting to that increased demand."
Also delaying the process is that if a home can't be saved, servicers are keen on trying to recover as much as possible for what could be multiple investors and that requires a fair amount of due diligence. "The challenge is buyers always want to pay as little as possible and sellers want to receive as much as possible," said Tom Kelly, a spokesman for JPMorgan Chase, which services 10.3 million mortgages. "The bank is the server in the middle."
From a prospective buyer's standpoint, purchasing a short sale property can be preferable to a foreclosure because if the borrower stills owns the home, he or she is likely to take better care of it.
However, with so many distressed properties for sale, and other homes selling conventionally at drastically reduced prices, there's a wealth of inventory available allowing buyers to get a quick yea or nay to their offer. Some buyers make offers on multiple short sales or write the offers so they can walk away if a lender doesn't respond within a certain time frame.
(c) 2009, Chicago Tribune.
Distributed by McClatchy-Tribune Information Services.
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