Suppose you can’t pay your mortgage, and you can’t sell your house because you owe more than it’s worth. You’re in quite a pickle.
You can stay until the sheriff shows up with the move-out order. Or, as more people are doing these days, you can try to escape your debt with a short sale.
Put the house on the market, and find a buyer willing to pay less than the mortgage amount. Then convince the bank to eat the difference, letting you off the hook for the remaining debt.
Short sales made up 8 percent of all home sales in metro St. Louis this spring, according to figures from RealtyTrac. Foreclosures make up 10 percent.
Attorney Elizabeth Kayser has made a specialty out of negotiating such deals, and it’s not a pleasant business. There are only two winners — the real estate agent, who gets a commission, and the attorney. There are losers aplenty.
The homeowner loses the house. The first mortgage holder takes a haircut. Sometimes a private mortgage insurer has to make up the mortgage holder’s loss. Often there’s a second-mortgage holder who stands to lose, too. All have to sign off before the deal goes through.
“Everyone is fighting over a piece of the pie and the pie is not big enough,” Kayser says. “Everybody has to bleed some.”
The homeowner’s goal is to get out without a “deficiency.” That’s the difference between the mortgage amount and the price of the sale. In a foreclosure, a bank is entitled to sue the homeowner for the deficiency, although most banks aren’t doing so at the moment.
The lender’s goal is to limit losses. Short-sale homes generally sell for more than foreclosures, and the bank avoids legal and maintenance costs. “It’s the lesser of the two evils,” Kayser says.
Kayser was a real estate lawyer, working mainly on land title issues, when the housing bubble burst and threw the real estate business into a depression. She realized that falling prices created the need for someone with skills in negotiating short sales.
“I researched it for a year before advertising and letting the real estate agents know we could help them,” she said.
How does a short sale work?
The homeowner retains a Realtor to list their property, and you list a price. If you initially list that property too high, or to low, that can kill your chances of getting to the closing table.
We advise on how to gradually drop the price. It’s a very delicate dance. If you drop it too far, the bank may send somebody out to do an appraisal. If that comes back higher than the offer, it makes it difficult to get an approval.
No longer can you throw a low-ball offer to the bank. Banks are way too savvy for that. . . .
The (approval) process will last two to four months. It will go to a negotiator, who has limited authority to approve an offer. If the offer is below his limit, it will be submitted to the investor. They hold the trump card. (Investors actually own the mortgage. Often the bank is simply servicing the loan on the investor’s behalf.) . . .
The mortgage insurers are definitely rougher than banks. If there is mortgage insurance, we’ll have to come up with a lump sum to get this deal done.
Second mortgage holders are the primary reason why a short sale doesn’t work. They are the deal killer. We spend most of our time negotiating with home equity lenders. . . .
While all this is happening, you have to keep that buyer on the hook. Short sales are not for the faint of heart, or for people wanting to move in quickly.
Suppose I can afford to pay the mortgage, but I’m just sick of the house. Can I convince the bank to accept a short sale?
That’s called a strategic short sale. That phenomenon has been increasing. It’s not good enough. Banks want to see legitimate hardship.
There are exceptions. If you have to move to San Francisco for a job, that is a legitimate hardship. Nearly all banks will accept that. They know that borrower isn’t going to keep paying the mortgage back in St. Louis.
What are the homeowner’s chances of getting all the remaining debt forgiven.
Pretty high. Banks are more likely to waive deficiencies today. If there is a home equity loan, there’s a good chance that all the deficiency will not be waived.
A lot of time home equity lenders will take a lump sum, say $10,000, and waive the $60,000 deficiency. A deficiency can be discharged in bankruptcy. That’s not worth a whole lot to a bank.
The U.S. Treasury has come up with a program for expediting short sales. It’s called the Home Affordable Foreclosure Alternatives program. The government provides money to the second-lien holders. (Homeowners may qualify for up to $3,000 in government relocation assistance.) The bank has to waive deficiency, and stop foreclosure.
Why should the a homeowner do a short sale if they can just walk away?
Their credit is going to be impacted more in a foreclosure. (FICO, the credit scoring company, says that a short sale hurts a credit score less than a foreclosure, but only if there is no deficiency.) Sometimes a job application will ask if you’ve been through a foreclosure, but they don’t ask about a short sale.
Many people we represent have a security clearance. A foreclosure affects a security clearance. A short sale will affect it less.
Lots of these deals get done without a lawyer representing the homeowner. Do homeowners need a lawyer?
You absolutely do. Every document the bank issues has a legal interpretation. The wording often isn’t clear as to whether that deficiency is going to be waived. They won’t mention the deficiency, which means the bank maintains the right to collect.
A lot of people with think they’re off the hook, but they’re not.
The bank pays a certain amount of legal fees for a short sale, and typically that’s how we get paid — by the bank. If it’s a bank that doesn’t pay legal fees, we’ll take a retainer from the client to represent them.