Lindsay Dukes

The Post and Courier

Falling prices, rising defaults boost use of short sales

Federal Reserve Chairman Ben Bernanke shows a map of national foreclosure rates during a speech last week in New York. Foreclosures can be costly for lenders, prompting an increasing number of companies to accept short sales as mortgage defaults soar.

The downturn in the housing market is prompting homeowners to discount their asking prices and sacrifice potential profits.

But for those who bought during the boom, when sales prices were at all-time highs, lowering the asking price might not be an ideal option because it would mean receiving less than what they owe on their mortgages.

And if those homeowners face an unexpected life event — a divorce, death in the family, job loss or transfer — the need to get a deal done quickly can mean they aren't able to hold out for their asking price.

For homeowners facing financial hardship or even the threat of foreclosure, there's a little-known selling strategy that might help salvage the situation.

A short sale, as it's called, allows cash-strapped homeowners to sell at a loss. Simply put, the mortgage lender agrees to accept an offer that is less than what is owed on the property. The concept is similar to a credit card company waiving fees and lowering interest rates to help keep a customer from filing bankruptcy to wipe out the debt.

The short-sale strategy is growing in popularity because lenders avoid the expensive foreclosure process, sellers' credit suffers less and buyers can score a bargain.

But a short sale doesn't come easily. The process can take months, and some lenders end up rejecting the proposals. It also requires a patient buyer. But for the persistent and determined, short sales can be the cure for a homeowner's financial ills.

"Banks are not in the business of selling real estate, so some are willing to work with homeowners," said Mark Weeks, an attorney who has worked on a growing number of short sales in the Charleston area.

The 15 percent solution?

Lenders that agree to short sales usually are willing to settle for a price that's 15 percent less than the mortgage balance, local real estate professionals estimate.

For lenders, short sales can help them steer clear of the lengthy and often costly foreclosure process. Between legal fees, property taxes and lost mortgage payments, the loss from a foreclosure usually amounts to tens of thousands of dollars.

Additionally, if the property doesn't sell at a courthouse auction, the lender still must sell it — and pay a real estate commission to boot. All the while, the value might have dropped if the home fell into disrepair.

Short sales work for homeowners, too, since foreclosures often result in more than just a blow to their credit scores, said Cheyanne Lake, who specializes in short sales for Mount Pleasant-based Reiland Lake Realty. Foreclosures can hurt a child's ability to get a federal loan for college and can even lead to the loss of a government security clearance.

Local homeowners who are now considering short sales likely bought or refinanced their property at the peak of the market, between 2005 and 2006.

But since then, property values have slipped in many Charleston neighborhoods, though experts agree that they will rise again as the market recovers. And the current economic downturn means some homeowners are bringing in less income or even have lost their jobs, Lake said.

Also, because some buyers relied on creative financing to pay for homes in recent years, such as interest-only mortgages, the principal balance they owe may have actually increased over time.

"If you bought in 2005 and you absolutely have to sell right now, it's tough," said Charles Holliday, an agent with Carolina One Real Estate who is marketing several homes as short-sale candidates.

Patience required

To start the short-sale process, sellers must swallow their pride. A proposal packet that is sent to lenders relies heavily on a hardship letter, which details the financial difficulties an owner faces. The letter must show the steps owners have taken to save their homes and document how they've changed their lifestyle to save money. The proposal also calls for the disclosure of tax returns, payroll stubs and other income sources.

"They want to know that you cannot afford this house, and you're not just trying to get out of some investment," Holliday said.

Lake is marketing a residence for one such hardship case: The seller has been approved for a short sale but can't afford to turn on the power long enough to let potential buyers conduct a basic inspection, she said.

In some cases, lenders offer to modify the mortgage after reviewing a short-sale proposal.

"The overriding premise is we'll do everything we can to keep a consumer in the house," said Todd Huss, vice president of mortgage lending for First Federal Savings and Loan Association of Charleston. Huss noted that First Federal shied away from unconventional home loans and, as a result, has had to negotiate fewer short sales in the past year than some other lenders.

Rob Jacobs is a Michigan-based short-sale negotiator who works with homeowners and real estate agents across the country, including Lake. He calls different mortgage providers throughout the day and may discuss several cases during a single conversation.

A short-sale proposal easily can take 20 hours on the phone to complete, Jacobs said. Local real estate agents can work directly with lenders, but it requires lots of patience and energy, he said.

Patience ran out at one Charleston real estate firm. Monterra LLC, an online brokerage group, gave up pursuing short sales after its agents put in half a dozen short-sale requests to lenders but never received a response.

"A couple agents who are very good agents were going berserk," said Irv Futeral, the firm's broker-in-charge. "It frustrated them."

Jacobs chalks up the lack of response to the general turmoil within the mortgage industry.

"Lenders are being inundated with defaults, and they weren't ready for it," he said. "Really, no one was ready for this, so they're just trying to figure it out as they go."

Weeks can pass as lenders decide whether to accept a short-sale offer. It often takes two or three months for a lender even to confirm that it has received a proposal, according to local real estate agents.

Meanwhile, buyers can get antsy. With more than 10,000 properties for sale in the Charleston area, they have lots of properties to pick from, and another home could catch their eye while they await a decision. But Lake said a sudden offer from the bank could prompt them to commit.

"Nobody's in a hurry to do anything," she said.

Selling short

Tips for homeowners who are considering a short sale:

Before beginning the lengthy short sales process, distressed homeowners should check first with their lenders to see if they can refinance or restructure their loan, allowing them to keep the property.

Direct any communication about short sales to the lender's loss mitigation department, not its customer service or collections department.

To avoid privacy law complications, homeowners should send a letter to all lenders giving them permission to speak with their real estate agent or attorney about their finances.

Short sale transactions that involve a homeowner's primary residence and happen before 2010 won't be taxable sales, courtesy of the Mortgage Forgiveness Debt Relief Act that passed late last year.

After a short sale, some lenders will bill homeowners for the difference between the owed amount and the discounted sale price. Sellers can avoid this by writing their contract to specify that they aren't responsible for the lost money.

Source: National Association of Realtors, Mark Weeks

Reach Katy Stech at 937-5549 or kstech@postandcourier.com.

Copyright © 1997 - 2007 the Evening Post Publishing Co.

The National Association of Realtors® commended Senators Debbie Stabenow (D-Mich.) and George Voinovich (R-Ohio) for introducing a bill today that would repeal a law that forces individuals to pay income tax when a portion of their mortgage loan is forgiven after a short sale or as part of a foreclosure.

Since the mid-90s, NAR has actively engaged in efforts to change this law and is encouraged by the actions taken today by the Senate in S.1394, the Mortgage Cancellation Tax Relief Act.

"This is a fundamental fairness provision. It will relieve a tax burden at a time when an individual has experienced a true economic loss arising from the loss of their principal residence," said NAR President Pat V. Combs, of Grand Rapids, Mich., and vice president of Coldwell Banker-AJS-Schmidt.  "NAR pledges to work with Congress to see that this new legislation is enacted quickly. Clearly, it is unfair to tax people on a phantom income when they most likely have no cash with which to pay the tax," said Combs.

In light of the many families affected by subprime mortgages and the anticipated rise in foreclosures, NAR has been working hard on behalf of homeowners to help more families keep their homes, but also to make the nightmare of losing their home less burdensome.

The current tax code requires a lender who forgives a debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. This disclosure applies whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of their debt. If the property is sold at foreclosure or is sold for less than was borrowed, that difference is considered income and is subject to the tax.

The Stabenow-Voinovich bill would ensure that any debt forgiven on disposition of a principal residence will not be taxed. "NAR stands strongly with the senators and the bill they introduced today. It addresses a fundamental unfairness in the lives of those who find themselves in truly unfortunate circumstances. Realtors® are about building communities, not just selling homes, and we want to prevent the dream of homeownership from becoming a nightmare," said Combs.

The legislation as drafted includes a provision to safeguard against abuses. The provision is similar to one that already exists for commercial real estate owners. This provision would equalize the treatment of commercial and residential property according to NAR.