This question comes up over and over again from Realtors, homeowners and homebuyers everywhere I go. A one sentence answer doesn’t exist for this question. If you truly want to know the answer to the question, “why” continue reading. This means you will have to take a step back from your particular emotional situation enough to really listen to what’s being said because everyone wants their deal approved NOW.
Banks are under no obligation to approve your short sale. I know what you’re thinking, reader. You’re thinking, “Well if the G.D. bank would just approve my short sale faster, they wouldn’t be losing so much money!”
Let’s start at the beginning. A homeowner is said to be in a short sale situation when he or she owes more than what the home is currently worth, is in default and must sell. Traditionally, homeowners agreed to pay back the difference between what was owed and the sales price. The short sale seller signed a new, unsecured note at closing and promised to pay back the difference in regular monthly installments. The only cases where the debt was “forgiven” was for true financial hardship cases where there was absolutely no way the homeowner could ever repay the difference. An example would be the untimely death of one of the breadwinners. But that was then.
In today’s politically charged, loan modifications for all, HoHo, let’s-dump-everything-into-FHA environment, homeowners in a short sale situation today are receiving debt forgivness and even temporary tax exemptions on top of that. Don’t worry, the rest of us tax payers will pick that up for you.
The first step in figuring out why your short sale is taking so long to be approved is to inquire about whether the homeowner is asking the bank to forgive the difference or if the homeowner is gainfully employed and able to pay back the difference. This all must be proven and documented to the lender’s satisfaction. If the homeowner is asking for debt forgiveness, the short sale will take longer to approve if the bank does not have all the required documentation.
Thought question: Why would any lender approve a short sale, especially one that requires debt forgiveness, unless there is proof that foreclosure is imminent? Answer: They won’t. Lenders have to weigh the costs associated with the short sale proposal against the cost of foreclosure. If a homeowner has not yet defaulted on their loan, the bank has little motivation to approve the short sale. Why not wait for a better offer to come along? (Note, homeowners reading this article should always consult with an attorney if you are selling short, in default, or will be in default on your mortgage loan(s).)
All loan servicing departments have processes in place for dealing with short sale approvals. They may not have fancy computer systems so that everything is automated but maybe that’s a good thing. Look where automated underwriting got us.
Next step: Homeowners must prove that they do not have the money to make up the shortfall. This means sending in copies of all bank statements, tax returns, w-2s, and other supporting documents to verify that the homeowners is financially insolvent. Short sales are reserved for people with NO MONEY.
Gentle reminder: The new sale must be an arms-length transaction. Another common problem that lenders must watch for is when the real estate agent on the transaction happens to be the “assigned” buyer on the purchase and sales agreement. The lender is not going to be thrilled in paying a real estate commission on that kind of transaction. Further, there are plenty of foreclosure rescue scams happening nationwide. Lenders scrutinize short sale offers to look for signs of fraud. Tanta reminds us:
Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn’t be. There cannot be.
Next, everyone who is patiently waiting for the bank to approve the short sale must now realize that once the bank says “okay” to the short sale, there very may be a long list of investors who own pieces of this mortgage loan. Each and every investor will have to give their approval for the short sale. We enjoyed many years of growth in the real estate industry and the overall economy thanks to the invention of Residential Mortgage Backed Securities. RMBS made millions of dollars for many people. The downside to securitizing mortgage loans and then selling off slices of each mortgage to different investors is that when it comes time to tell the investor “you’re going to have to take a haircut” that investor gets to have a say in the matter.
Calling loan servicing and yelling at them over the phone will get you nowhere.
I would like to be first to predict that the next meltdown will be loan servicing. But perhaps my prediction is so obvious as to not be much of a prediction at all. How much longer can they sustain this level of stress and pressure, with their current staffing levels, while the banks are facing enormous losses? Of course when that meltdown happens, I predict our government will step in and mandate harsher regulations on servicers, which will be passed on to the consumer in the form of higher interest rates.
Loan servicing use to offer what it said: “service.” It was treated as a cost center on a bank’s balance sheet. Over the past 15 years, servicing became a “profit center” and the highest expense, namely labor, was cut to achieve profit goals. This is one more lesson in underpricing. The cost of “good” loan servicing in which phones are answered and files processed smoothly, would have cost us all way, way, way more on the retail end, than what we paid.
Let’s say we could create instant loss mitigation nirvana today. All phones are answered on the first ring, all short sales are approved with no questions asked, no documentation required, no proof of hardship necessary, no proof of financial insolvency needed, and all Realtors receive their full 6% commission.
The consequences of not performing due diligence at the loss mit stage are disaster for all of us. Compare this to the current nirvana we just left behind: A world where anyone could get a mortgage loan with no verification of ability to repay, with massive fraud still being uncovered. We need to do it right this time, and it takes TIME to do proper short sale loss mitigation.
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