Why does it take so long? Narrative from a short sale processor…
The first thing that comes to mind whenever I begin the short sale discussion is why does it take so long? Every agent asks the same question. Unfortunately I can’t offer a simple straightforward answer. I typically respond with probing questions like: what kind of loan is it? Are the borrowers in a hardship? Have they paid their HOA fees? Are they current on the mortgage? Have they been ignoring the bank for the last six months? All of these questions are met with a blank stare, inevitably confirming my thought as a processor – most agents think that a short sale is about selling the house – the reality is a bit more convoluted: yes, it’s about the house, but it’s also about the borrower.
When we explain a short sale to an agent or a consumer, we begin with the purchasing process. In any standard purchase there are two people involved, the agent and the loan officer. The agent focuses on the property, and the loan officer works with the buyer on getting the financing done. Again, we get blank stares – ‘how does this relate to trying to get a short sale done?! ‘A short sale in simple terms is reverse underwriting. Normally an agent starts by looking for a listing for their buyer, once the buyer finds a home they like, they work with a loan officer to prove (a) their credit worthiness, (b) their ability to repay the note, and (c) that the home is worth what the bank is lending. In a short sale these factors are turned on reversed.
First, the seller finds an agent to list the property. Once the property is listed and a buyer is found, a processor works to prove (a) the borrower has an extenuating circumstance that prevents them from paying for the home (illness, loss of work, relocation) and (b) the fair market value of the home is less than the amount owed on the property. If these conditions are present, then there’s a viable short sale. It should be noted that I’ve referred to fair market value. Investors seeking to make below market offers should prepare for a cumbersome process that will likely end in counter offers from the bank, accompanied by ‘anti flip’ affidavits preventing them from selling the property for 180 days. Although I can explain the process in detail, I still run into the same question: why does it take so long. The answer contains many variables and each has to be addressed.
Q: Why does it take so long?
A: The time involved completing a short sale is dependent on the following factors: (1) lender/servicer, (2) investor, (3) seller, and (4) processor.
The real estate market has been a disaster for major lenders/servicers since 2007. In addition to record default rates, they’ve also had to deal with the logistical nightmare of processing hundreds of thousands of delinquent accounts. The sheer scale of the real estate meltdown is trumped only by the effort and resources needed to clean it up.
Loss mitigation ‘buckets’:
- Re finance – HARP (Fannie/Freddie only)
- Loan Modification
- Short sale
The bank’s primary objective is retention for the borrower; if the borrower stays in the home the lender is likely to continue to receive payments.
The bank requires verification from the seller in writing and often times over the phone, that they are foregoing home retention for a short sale
Sellers often ignore communication from the bank making it impossible to move forward in the short sale process.
Trouble shooting tip: If an offer has been made and it’s more than 3 or 4 weeks before a BPO or an appraisal has been ordered, the bank is likely looking to hear from the seller or missing paperwork.
Retention is the primary objective for the bank…
FHA requires an Approval To Participate in order to move forward with a short sale; they also require a formal appraisal in order to issue approval. The process is a bit more technical than dealing with a standard investor.
VA loans require a Compromise Sale Agreement Application to be completed prior to processing a short sale; this too adds an additional layer to the short sale process.
Private investors are typically easier to deal with, but their processes aren’t as clear cut as those of Fannie, Freddie or VA.
Key items to identify with the seller
- In default?
- Is the property a primary residence or investment property?
- Does the seller have assets? Funds in retirement savings, bank accounts etc.
- Is there PMI?
- Are there multiple liens?
- Taxes, municipal works
A motivated seller is an asset in a short sale; an unmotivated seller can break the deal. Identifying which is which can save a lot of time and effort.
Experience counts. A processor needs to have a thorough understanding of the lending process in order to effectively understand the short sale process.
Short sales are made or broken based on ‘net’ proceeds to the lender/investor. Buyers can spin their wheels if the ‘net’ concept isn’t understood by the processor.
Volume: short sales are time intensive and paper work heavy transactions, the processor MUST take this into account and staff accordingly.
Equator: a processor MUST be an experienced Equator user. Equator is currently being used by all of the major servicers to manage short sales. Equator is a sophisticated piece of software, not understanding its use can lead to poor results.
Gabriel Tavarez; Principal, Loss Mitigation Services, Llc. North Andover, MA. We offer full line short sale processing for consumers and real estate professionals. Our exclusive focus is short sale processing and we offer industry leading service to agents by supporting their clients through the entire process.