Coto de Caza Real Estate - Short Sale Market Update
Posted by Leslie Eskildsen on Wednesday, April 28th, 2010 at 6:44pm.Ever wonder why it takes so long to get an offer to buy one of the short sale homes for sale in Coto de Caza approved? The truth may be very different than what you might think.
It would seem since Orange County home values are down up to 40% in some neighborhoods and thousands of homeowners owe more than their home is currently worth that it is in everyone's best interest to approve a short sale. Especially when Mortgage Bankers Association statistics show that a foreclosure typically costs the lender 30 percent more than a short sale.
As any Coto de Caza Realtor or home buyer who has tried to close a short sale offer will tell you, closing a short sale can be a very long and complicated process.
In July of last year, Bank of America claimed it was going to streamline
its short sale process so that it would only take seven days to make a decision on a short sale package.
Judging from the numerous blog posts from both Orange County home buyers and Realtors, this has yet become a standard. Orange County short sales are still taking many weeks and often months to complete. Truthfully, any lender could complete the approval process
in seven days, but the delays are often caused by other parties in the transaction.
One of the most prevailent complications in closing short sales in a timely manner is secondary financing. If the holder of the first mortgage is taking a loss to get the non-performing home owner out from under their home, it usually is reluctant to give any type of payoff to another lender who is in second position.
The holder (or holders) of the secondary financing can refuse to cooperate unless it receives part
of the sale proceeds. A common request that many secondary lenders seem to be making is for 10 percent of their outstanding balance. If the loan goes to the loss recovery department, the request can be $5,000 plus 10 percent of the loan balance.
Very often, the holder of the first may have a cap on what it will allow to be paid to any secondary lien holders. So even though the second lien holder demands 10%, this may exceed the limits of the first lien holder - and thus the stand off - delaying the process until the numbers can be negotiated.
The challenge for Realtors and home buyers is how to navigate through this complicated maze. When
there is secondary financing on the property, one strategy is to find out up front what their payoff requirement or minimum amounts are.
On top of knowing the policy of the second lien holder, you must also know what the first mortgage holder will require. Almost all lenders have specific
policies about how much of a reduction they are willing to take, as well as how much can be paid
to other lien holders. Having this information up front is crucial if you want to avoid wasting your time on a transaction that won't ever close.
An additional twist in this scenario is that many first and second mortgage holders are now
monitoring the homeowner's credit. If the homeowner is staying current on other payments while pursuing a short sale, the lender may require the home owner to sign
a promissory note for the shortfall.
Otherwise, the lender may choose to foreclose, which could force the home owner into bankruptcy.
Making short sales even more complicated, distressed home owners who put less than 20 percent down on their home have private mortgage insurance (PMI).
Here's an example of PMI: Assume that a borrower is putting 10 percent down and obtaining a 90
percent loan. PMI insures the 10 percent "difference" between the borrower's down payment
and what would have been an 80 percent loan amount.
What seems to be a common source of frustration for both Realtors and home buyers is that the PMI
companies have joined the lenders in requiring homeowners to sign a promissory note for the shortfall
amount.
PMI companies are insurance companies. It's simply good business for PMI companies to limit their losses and payouts - true for all insurance comanies. If the home owner will agree to the
promissory note, that reduces the PMI company's losses, which looks better on its balance
sheet. On the other hand, if the PMI company agrees to the short sale, it has to make an immediate
payout on the lender's claim. By refusing to approve the short sale, the PMI company forces the
lender to foreclose on the property.
The foreclosure process can take months to complete, and then even more time before the
property sells and closes as a bank-owned property (also known as real estate-owned or REO).
The net effect for the PMI company is that it puts off paying its claim for 12-24 months.
Also, if the market improves, the lender's claim may actually be less one to two years from now
than it is today.
However, there's still another zinger.
Suppose that a property has declined in value by 20 percent, completely wiping out the holder of a
10 percent second mortgage. The first mortgage holder offers the second a 5
percent payout to close the transaction.
The second says "No," because if they file a claim with the PMI carrier, they
get the full 10 percent. No surprise that a number of major lenders who have made equity loans may have an additional incentive not to agree to a short sale.
This may explain why so many holders of secondary financing say "No" to the short sale
and prefer a foreclosure instead.
There are many reputable lenders doing everything they can to
help consumers. Buyers agents and home buyers have no way of knowing what the various
requirements will be until you dig into the details of each individual short sale situation.
And if it seems like there can't be anything more complicated about a short sale, wait util you hear about concurrent closes or A to B B to C short sales. Stay tuned for more on that subject. In the mean time, if you are contimplating buying a short sale home for sale in Coto de Caza or any other Orange County community, make sure you have as many of the facts established up front. That way you can make informed decisions about whether waiting through the process may be worth it or not. And as always, trust your Realtor to help you through.
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