Following hard on the heels of the subprime debacle, mortgage
lenders are dealing with an increase in the number of short sales,
making for a bumpy time in the housing market.
Following hard on the heels of the subprime debacle, mortgage lenders are dealing with an increase in the number of short sales, making for a bumpy time in the housing market.
Short sales move houses off the market, but leave lenders holding the bag, making some mortgage brokers more cautious about lending.
“Unfortunately, it’s the rule rather than the exception,” said Nancy Frimann, a mortgage broker in Morgan Hill. “What we’re seeing is that the length of time to get approval by the bank is excessive. It seems unnecessary. We also have lenders that won’t accept a contingent sale where someone has to sell their house before buying another. (Short sales) have had all kinds of ripple effects in the market.”
A short sale is an agreement by a bank or mortgage lender to discount a loan balance because the mortgagor is experiencing financial difficulties. In that case, the homeowner sells the property for less than the outstanding balance of the loan and pays off the outstanding debt with the proceeds of the sale. The bank or mortgage lender would have the option in that case to approve or disapprove the sale.
The lenders lose money in a short sale situation, but not as much as they would in the case of a foreclosure because the property may need renovation or repair before it can be sold again, and there is no guarantee that the lender will be able to sell the property for the amount of the mortgage loan due after a foreclosure.
According to industry experts, the number of short sales grew last year and is expected to jump dramatically this year, perhaps reaching record levels.
Often the lender will approve a short sale because the financial loss in that case would be less than if there was a foreclosure on the property.
John Wunderlich, loan officer and Realtor with Continental Mortgage and Help-U-Sell in Morgan Hill, said the real estate industry is reeling under the impact of this new twist to the market.
“This has hit very hard,” he said. “The lenders are really struggling to come to terms with this. You’re creating a situation lenders are not used to, and they aren’t accustomed to handling this volume of a problem. It’s now very, very common, and lenders are overwhelmed by it … I don’t believe they are staffed and prepared to do this, it isn’t part of normal day-to-day business.”
One of the effects of the short sales is, however, positive, according to industry experts. First time home buyers, provided they can qualify for a loan, can get more house for the money than they might have been able to a year or two years ago.
“You can get a jewel for a low price,” Frimann said. “They’re going to see nothing but appreciation very quickly. It’s all pointing towards positive growth in the future. Raising the conforming loan amount, the low prices in the market, I think we will start to see a turnaround. It may take some time, but it is going to happen. There’s a pent-up demand out there because buyers have been staying home for so long.”
On the down side, what appears at first blush to be a “win-win” situation – the borrower is forgiven the debt and the lender doesn’t lose as much as perhaps would happen with a foreclosure – can have serious consequences. For the mortgagor, a seven-year black mark on their credit history.
Many banks and mortgage lenders are now utilizing the services of a “loss mitigation” department, with agents or brokers who work with the borrowers to find an alternative to foreclosure or short sale. There are several options, including altering the terms of the loan to extend the length of the loan or lower payments, and adjusting the interest rates.
“Banks have become a little bit wise,” said Mary Anne Filice, with Filice Realty in Hollister. “The housing market has been going down about 10 percent a month, and banks haven’t kept up with the market. But they are seeing the short sales now. It’s the Realtors’ job to communicate with the banks and let them know this is the true value of the house, and (the loan) ought not to be based on what it might have been three or four months ago.”
