Is a Short Sale for you? Below is information concerning Short Sale properties. Remember, I'm always just a phone call away to help you with all of your real estate needs!
The California real estate industry is showing signs of recovering from a serious recession. Nevertheless, thousands of people remain unemployed or underemployed and are not generating the income they once had. In addition, property values have plummeted during the economic downturn. Therefore, many homeowners possess loans whose current balance exceeds the likely sales price of the property. Consequently, these unfortunate people face the grim possibility of the lender foreclosing on their home if they fail to make their mortgage payments.
A lender making a loan secured by real estate obviously expects the borrower to eventually payoff the loan in full. However, should the borrower default on the obligation, the lender has the right to foreclose on the real property securing the loan. A lender's foreclosure right poses two threats to a borrower defaulting on a mortgage loan: loss of the borrower's home and a foreclosure on the borrower's credit report. Therefore, it behooves a borrower to at least consider negotiating a settlement agreement with the lender.
The term "short pay/sale" is becoming a recognized term for describing those transactions in which lenders agree to accept a payoff which is less than the full amount of the borrower's debt.
Q: Why Might Lenders Opt For A Short Pay?
At first blush, it may seem hopeless to ask a lending institution to consider accepting less than what it is owed on a real estate loan. After all, lenders have the right to foreclose on the defaulting borrower's real property which secures the underlying loan obligation. Why then should a lender consider negotiating a short payoff with that borrower?
In reality, lenders have ample incentive to arrange a short payoff with their distressed borrower. Once a lender takes back a property pursuant to a foreclosure sale, the lender becomes responsible for a variety of costs, including property maintenance, vandalism, utilities, and property management. Furthermore, in the current California real estate market, lender owned properties (REO) may take up to two years to sell, in part because so many REO properties are now for sale. In fact, in some areas of the state, REO sales account for 25% or more of total sales.
Another reason lenders consider short pays is that regulatory agencies, such as the Federal Deposit Insurance Corporation (FDIC), limit the number of loans a lender may make when holding REO properties. How does this process work? Institutional lenders ordinarily borrow money from a federal agency, such as the Federal National Mortgage Association (Fannie Mae). These Fannie Mae loans are made to institutional lenders at a relatively low rate, say three percent. The bank in turn lends the money to consumers at a higher interest rate, say seven percent. The difference between seven and three percent accounts for the lender's profit.
The FDIC (or some other regulatory agency) considers an REO property on the lender's books a "non-performing" asset. Why is this? Once the lender takes back a borrower's property pursuant to a foreclosure sale, the borrower is obviously no longer making payments on the loan. Therefore, the loan is a non-performing asset, since it no longer generates any income.
Because the lender now has a non-performing asset on its books (REO property), the FDIC will restrict the amount of money the institutional lender can borrow from Fannie Mae or some other federal agency. This in turn limits the amount of profit a lender can earn.
If this were not enough, lenders having REO properties on their books may also receive a lower rating from the FDIC. This could hurt a lender, since Fannie Mae and other agencies might rely on this rating when considering whether to lend money to that lender.
Other practical reasons exist for a lender to negotiate a short pay. Defaulting borrowers, under considerable economic pressure, are ordinarily very cooperative and flexible in arranging a short payoff. Also, borrowers who agree to a short payoff can usually be trusted to not remove items from, or otherwise damage, the property. Finally, the continual decline of REO property values gives lenders incentive to negotiate a short payoff with the distressed borrower.
A Short Sale property should be considered for it's market value just as any other real estate property. For some buyers, this type of property might perfectly fit their home buying needs. Just remember, although the owner may quickly agree to your offer on their home, the final approval rests with the lender's acceptance. Also, be prepared for the lender approval to take up to 6 weeks. After that approval is reached, closing escrow and actually moving into the home could take another 4 weeks or so. These type of properties are not for those that don't have patience or are on a tighter time frame to move.
