Sometimes, I get so tense But I can't speed up the time But you know, love, there's one more thing to consider Said woman take it slow And things will be just fine You and I just used a little patience
Guns N' Roses -- Patience
Lenders, sellers, buyers, all are playing the patient waiting game. Lenders and sellers are waiting for prices to go up -- which isn't going to happen as long as they need prices to go up because each needy sale prevents prices from appreciating. Buyers are also forced to be patient as lenders withhold product from the market they are afraid to sell because they know it would lower prices.
With everyone involved being forced to be patient, sales are near all-time lows, and the housing market languishes under the weight of distressed inventory.
Short sales could accelerate the resolution of the housing crisis—if the process is streamlined by the big federal mortgage lenders
By Kathleen M. Howley
Charles Wright of Henderson, Nev., fell behind on his mortgage last year after a divorce squeezed his finances. He twice arranged to sell his house for less than its loan balance, a so-called short sale, only to see the buyers walk away because it took too long to get approval from the holder of the mortgage. "I couldn't even get a call back, never mind a yes or no," says Wright, 30, whose loan was owned by Fannie Mae, the government-run mortgage-finance company. "Why make it so hard to sell when the alternative, foreclosure, means an even bigger loss for lenders?"
Good question. Thomas Popik, research director for Campbell Surveys in Washington, which conducts national monthly surveys of 3,000 real estate brokers, says more short sales could stem steep home-price declines. Although the home is sold for less than the mortgage in a short sale, it stays out of foreclosure, where the holder of the loan seizes the house and auctions it off at a steep discount to current value. "Any time a short sale can be substituted for a foreclosure, it's extremely good for the housing market," says Popik.
Mr. Popik is wrong. Short sales do more damage to the housing market than foreclosures do. Let me explain.
Short sales are more damaging
I buy and sell foreclosures. The biggest market risk and uncertainty I face is the presence of short sales.
When I buy a foreclosure, the sale at auction is not considered by appraisers in the resale market. Since my auction purchase is all-cash, it is not considered indicative of resale market value. In short, foreclosures do not hurt resale market value unless and until they are resold on the MLS for less than current comps. Since most flippers are trying to maximize profits, they are trying to sell for the highest price they can get, so reductions from current comps are minimal. Short sales don't work the same way.
Short sales are a pain for buyers. They take forever to close, and there is no guarantee that the deal will close even after waiting months for the lenders to approve the sale. The only reason buyers go through the effort is because they either can't find other properties, or they expect a good deal for their patience. Short sales reset market values far more often than foreclosure resales do.
I deal with this market reality every day. Short sales are like ticking bombs waiting to take down the market comps when they close. It is common to Las Vegas to see short sales sell for 10% to 15% below recent comps. Two or three of these in a neighborhood, and appraisers cannot ignore the comparable resales, and the entire neighborhood is brought down. When lenders won't provide the loan, it doesn't matter if the buyer is willing, the sale isn't going to happen unless the buyer backs their willingness with cash. Short sales are comp killers.
And now back to the article:
There were 243,000 short sales in the first 11 months of last year, according to CoreLogic, a research firm in Santa Ana, Calif. That compares with 1.2 million notices of pending auctions in the same period. A lengthy consent process by loan holders deters potential buyers from agreeing to a short sale. In a normal home sale, people make an offer and get a decision from its owners within days, if not hours. For a short sale, the average time between a price bid and response is three and a half months, according to Campbell. The California Association of Realtors estimates that delays kill about half the short-sale deals in the state.
Who wants to wait around for a capricious lender?
The biggest mortgage holders, Fannie Mae and Freddie Mac, completed 7,768 short sales in January, down from 9,373 in the prior month. "I get the sense that Freddie and Fannie have been trying harder to make things work, say, over the last 8 or 10 months, but it still is a fight to get these deals through," says Ron Wilczek, owner of Metro Phoenix Homes, a real estate agency in Tempe, Ariz.
Fannie Mae approved a short sale for Wright, the Nevada homeowner, after he found a third buyer. A deal went through on Feb. 15, two weeks before the house's scheduled foreclosure auction. The price was $265,000, 37 percent less than what Wright paid in 2007 and about $125,000 short of what he owed Fannie Mae.
If Wright's property had ended up in foreclosure and got sold at the local auction venue—a parking lot near the casinos and wedding chapels of the Las Vegas Strip—Fannie Mae's loss might have been greater. Foreclosed properties typically sell at a 28 percent discount to current market value, according to RealtyTrac, a real estate data company in Irvine, Calif. At least Wright, in his short sale, sold his house for close to its current value.
Did the lender really obtain a greater recovery at short sale? If they had foreclosed in a timely manner months ago when the borrower first went delinquent, prices were higher, and the recovery would have been greater. Plus, the real estate commissions and other sales costs not paid at auction eat into recovery amounts. Further when you factor in the portfolio cost of lowering neighborhood values, and short sales aren't the magic elixir they are made out to be.
When it comes to approving short-sale offers, what seems like dawdling to buyers and sellers may be lightning speed to the mortgage industry, says Faith Schwartz, executive director for the HOPE NOW Alliance in Washington, a group of home-loan investors, lenders, and mortgage servicers including Bank of America and Wells Fargo. Before a short-sale offer can be approved, the holder of the home loan must agree to the price, she says. Other parties may have to assent as well. About half of troubled mortgages involve homes that have so-called second liens such as home equity loans, according to the Treasury Dept. Mortgage insurers may get involved, too.
"All those pieces have to fall together, and that takes time," says Schwartz. Fannie Mae has set up a program that lets real estate agents talk directly with Fannie when they run into roadblocks during a short sale, says Marcel Bryar, a vice-president at the mortgage financier.
Remember, a short sale is an extended negotiation between the borrower and the subordinate mortgage holders. It isn't usually the first mortgage holder who objects to the sale. Since the second mortgage is generally a complete loss and most borrowers are insolvent, this negotiation can easily get bogged down.
The Federal Housing Finance Agency, which regulates Fannie and Freddie, wants short sales to be "consummated efficiently," says Corinne Russell, a spokeswoman. Short sales can prevent neighborhood decay by limiting the number of vacant homes and can "ultimately help save taxpayer dollars," she said in an e-mailed statement.
That's just stupid. Absentee owners generally don't bother with short sales. Most short sales are delinquent owners occupants squatting in the property. They have no incentive to move out until the short sale is completed because they will have to start paying for housing once they leave. Plus, what possible incentive does an short-sale occupant have to maintain the property? Any money they spend is not going to come back to them as equity.
Marie McDonnell, owner of Truth in Lending Auditing & Recovery Services in Orleans, Mass., says loan servicers may be responsible for the delays in short sales. Servicers earn fees by sending the monthly bills and collecting mortgage payments, though they typically don't own the mortgage. They also are in charge of communicating with the mortgage holder when the homeowner wants a short sale. That power gives the servicers the motivation to drag their feet as they rack up additional late fees. In Wright's case, Fannie Mae says it acted in a timely manner once it was told by the servicer of Wright's request.
Banks are in no hurry to recognize the losses on their second loan portfolio. With billions in bad debts on their books, the major banks -- who are also major loan servicers -- are not foreclosing on those homes where they hold the second mortgage. Those borrowers blessed with those circumstances will be allowed to squat indefinitely.
Chris Killian, a vice-president at the Securities Industry and Financial Markets Assn. in New York, says servicers dealing with an avalanche of defaulted mortgages generally don't have an interest in keeping loans in limbo. Says Wright: "Everyone could save a lot of headaches if the process could be speeded up."
The bottom line: Short sales could accelerate the resolution of the housing crisis—if the process is streamlined by the big federal mortgage lenders.
The bottom line: short sales make the housing crisis worse by lowering neighborhood comparables. Until we stop messing around with short sales are begin expediting foreclosures, prices will continue to grind lower as each new short sale resets the comps to lower values.
When do we get our next HELOC?
The owner's of today's featured property have been bouncing along with the same maxed-out mortgage balance for the last 5 years. They must have gotten tired of waiting for the next HELOC cash infusion, and instead they are selling the property short. They don't want to hang around and pay off any debts. The house is supposed to do that.
Today's featured property was purchased on 4/4/2000 for $160,000. The owners used a $127,920 first mortgage, a $23,985 second mortgage, and a $8,095 down payment. They waited two years before going Ponzi.
On 4/30/2002 they refinanced with a $201,562 first mortgage and obtained a $21,500 HELOC.
On 5/28/2003 they refinanced with a $206,000 first mortgage.
On 12/2/2003 they refinanced with a $244,000 first mortgage.
On 1/8/2004 they obtained a $30,000 HELOC.
On 11/4/2004 they obtained a $100,000 HELOC.
On 6/20/2006, right at the peak, they refinanced with a $378,000 first mortgage.
On 3/28/2007 they refinanced with a $378,000 first mortgage.
On 9/10/2007 they refinanced with a $377,000 first mortgage. They actually paid it down!
On 6/19/2008 they refinanced with a $382,000 first mortgage.
Total mortgage equity withdrawal is $230,095.
This property is being offered as a short sale. Perhaps the California Housing Finance Agency will provide them mortgage assistance. These borrowers seem worthy of a bailout, right?
-$148 .......... Tax Savings (% of Interest and Property Tax) -$368 .......... Equity Hidden in Payment (Amortization) $20 .......... Lost Income to Down Payment (net of taxes) $59 .......... Maintenance and Replacement Reserves ============================================ $2,199 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $3,099 .......... Furnishing and Move In @1% $3,099 .......... Closing Costs @1% $2,991 ............ Interest Points @1% of Loan $10,847 .......... Down Payment ============================================ $20,035 .......... Total Cash Costs $33,700 ............ Emergency Cash Reserves ============================================ $53,735 .......... Total Savings Needed
Property Details for 15 SAGE #41 Irvine, CA 92604 ------------------------------------------------------------------------------ Beds: 2 Baths: 2 Sq. Ft.: 1022 $303/SF Property Type: Residential, Condominium Style: Two Level, Traditional View: Park/Green Belt Year Built: 1976 Community: Woodbridge County: Orange MLS#: S654957 Source: SoCalMLS Status: Active ------------------------------------------------------------------------------ Stylish and so sharp - 2-story END UNIT in Woodbridge located across from a large park with peaceful views. A sunny & bright remodeled kitchen has custom French doors leading out to your own large private patio with storage area and fountain. Offering 2 spacious bedrooms, 2 tastefully remodeled bathrooms, whirlpool tub, attractive wrought iron on staircase, 2 ceiling fans, inside laundry and cozy living room with crown molding. One of the best locations in the complex with all the amenities Woodbridge Village has to offer, including pools, tennis courts, lakes, parks and much more. Please visit www. wva. org for additional community photos and details. IMMACULATE HOME AND IN MOVE-IN CONDITION!
Did the lender really obtain a greater recovery at short sale? If they had foreclosed in a timely manner months ago when the borrower first went delinquent, prices were higher, and the recovery would have been greater. Plus, the real estate commissions and other sales costs not paid at auction eat into recovery amounts. Further when you factor in the portfolio cost of lowering neighborhood values, and short sales aren't the magic elixir they are made out to be.
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