Short Sales And Foreclosure

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The NY Times wrote an interesting piece on how short sales can help borrowers in foreclosure. In my experience, I have seen many people talk about short sales but it doesn’t always work out. Whether a bank will agree to this varies from one loan to another.

MortgagesShort Sales: Saving Borrowers the Stigma of Foreclosure The New York Times

By BOB TEDESCHI
Published: August 17, 2007

HOMEOWNERS who have seen the value of their houses drop below the amount left on their mortgages and who are struggling to make their monthly payments often believe their only option is to walk away from the loans and accept a foreclosure.

Not so, lenders say. Borrowers can both avoid foreclosure and escape their mortgage debt, provided they are willing to give up their homes and accept at least some collateral damage to their credit ratings.

This financial workaround is called a “short sale,” and it involves working with the lender and a real estate agent to sell the house at a loss.

For example, consider a borrower who owns a home that has fallen in value from $400,000 to $375,000, but who still owes about $400,000 on the mortgage because the loan required no down payment — a common enough feature before the current mortgage crisis.

If the borrower is struggling with the monthly payments and has no means to pay off the mortgage, a bank will often consider a short sale.

“As long as the customer is being reasonable, we’ll entertain this as a possibility, because we don’t want the home,” said Robert Caruso, a senior vice president of Bank of America. “We’d rather sell it and take a little more of a haircut on it now than later.”

Banks generally avoid foreclosures because the legal process — particularly in the greater New York area — can be costly and long, and because banks do not want the additional burden of trying to sell distressed properties.

So in the example of the $400,000 mortgage, after the borrower and the bank agree to a short sale, the bank will suggest a real estate agent or ask the borrower to find one, then the house will be listed at its appraised value. When the house sells, the bank takes the money, pays the agent’s commission and voids the mortgage.

So assuming the final sale price is $375,000, the bank might end up with $345,000. (By the time a borrower considers a short sale, he or she is often several months behind on mortgage payments and property taxes, which the bank also covers.)

And what about the borrower with the $400,000 mortgage? “We’ll typically forgive the debt,” Mr. Caruso said. “There may be some impairment to your credit history, showing you have missed payments and the short sale. But it’s a lot better than having a foreclosure.”

Mr. Caruso and other lenders say they expect to see more short sales in coming months because default rates are increasing, especially among those with poor credit who have taken out adjustable loans that may rise sharply in coming months.

Ken Baris, the president of Jordan Baris Inc., a real estate agency in West Orange, N.J., said that short sales were already on the rise in the New York City area. “In some cases, I’m hearing about things actually going to foreclosure,” he said. “Not every situation gets worked out.”

But, Mr. Baris said, borrowers who approach the bank after securing the services of a real estate agent with experience in short sales often find that the bank is receptive.

“In some cases, we’ve helped avoid foreclosures,” he said. “If we tell the bank we believe it’ll get sold and give them the estimate, they may give us time to get the job done.”

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