Selling homes short
In the 1990s and early 2000s, banks foreclosed on homeowners who couldn’t or didn’t make their mortgage payments. A home would continue to grow in value and a bank could remove the owners who weren’t paying up and sell to owners who could at a higher price.
Then in 2007 the system changed. Lenders gave unqualified home buyers mortgages, turned around and sold those mortgages to Wall Street investors.
Since housing values went up for so long, lenders figured home buyers could keep up with mortgage payments since the equity in their homes would grow.
When housing prices went down, mortgage rates went up and homeowners were having a hard time paying mortgages they shouldn’t have received in the first place.
That left banks in a quandary, said Bill Ferrall, director of business relations for the Tahoe Lending Group.
“One of their recourses is to foreclose, and that means they may have to improve the property if they are dealing with a disgruntled owner who might damage the home by pouring cement down the toilet or something crazy,” Ferrall said.
The other recourse banks and homeowners who can’t make payments have is to perform a “short sale.”
This is a difficult process, said Paul Spaulding, a Realtor with Coldwell Banker in Incline.
A short sale happens when a homeowner can no longer afford their mortgage and receives a notice of default after missing their payment for 120 straight days, sells their home for the remaining balance of the mortgage, paying their loan off and walking away with nothing.
“First a homeowner must send in a letter showing they can’t pay their mortgage any more, and it will negatively impact their credit, dropping it about 100 points,” Spaulding said.
He said he’s dealt with a few in the last year in Incline when homeowners go “upside down” on a mortgage, meaning they cannot make payments any more.
Spaulding said there are plenty of issues to go along with short sales that make them a headache for lender, seller, buyer and Realtor.
He said a homeowner must provide tax returns to the lender to prove they can’t pay for the home, in addition to other personal financial information which someone normally wouldn’t have to reveal.
Lonny Parsons, a local Realtor with Coldwell Banker, said the short sale financial information package includes two years worth of tax returns, two months of bank statements, other financial information and a letter of hardship, which could include a sickness in the family or loss of job.
For Spaulding, handling these issues is still relatively new.
“I actually wasn’t aware of it (short sales) before last year,” Spaulding said.
Ferrall said that while short sales have been around nearly as long as the mortgage industry has, they have definitely picked up in the year since the 2007 mortgage crisis and gained notoriety.
John Eppolito, a Realtor with Dickson Realty, is another local agent who has recently seen a spike in defaulted mortgages and short sales.
“It’s really a last-ditch for most people before foreclosure and requires the buyer and bank to take on a lot of workload and red tape to get it done,” Eppolito said.
He said some issues which arise from short sales stem from homeowners who are willing to walk away with nothing but can’t work with lenders because they are unresponsive.
In turn, interested buyers walk away from a pending deal because it can drag on for months, even though the buyer could get the home for a low price.
Ferrall explained lenders are stuck because they don’t actually hold the value of the mortgage, which they sold to Wall Street investors.
“The truth of it is they don’t hold the paper any more,” Ferrall said. “I’d use Countrywide as an example of a lender who may have an interested seller and buyer but they aren’t in charge of the mortgage any more. So they have to go back to the guy who bought it on Wall Street to get the paper back, and by that time the buyer became tired of waiting and moved on.”
The wait could be worth it, Eppolito said, because buyers can receive the home at a huge discount.
“Buyers have to be patient and may have to wait as long as two and a half months, but the savings are huge,” Eppolito said.
He said the homes are generally so discounted that buyers pay for them all in cash.
It can also be worth it for sellers, Parsons pointed out in an e-mail to the Bonanza.
He said homeowners don’t pay for anything and avoid a foreclosure on their credit report.
They also provide assistance to homewowners in financially difficult situations which otherwise couldn’t be helped and allows homeowners to get on with their lives, Parsons said.
Short sales have a limited sucess rate, though, Spaulding said, and Ferrall said if they happen at all is up to the lender.
“It’s a matter of marketability for the lender,” Ferrall said. “If they can get more out of the property by foreclosing, they’ll do that. But, if there is an offer on a short sale which is more attractive and the lender can’t sell the home without making improvements, they’ll take it.”