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Short Sale Proposed Solution for Quicker Bank Response Times

Yesterday, I was presenting an offer to another Realtor for a short sale listing of hers. We almost didn't get the offer accepted because I put a provision in the contract to allow for a 24 hour right of first rescission after the bank approves the offer since we will be out looking at other homes while we wait.

In Idaho, we have a short sale addendum that allows either the buyer or seller to back out any time prior to bank approval; however, since I have no control on whether that will be a month, two months, four months, or never; I always have my buyers keep looking (unless they are just investors).

What would happen if the buyer found another home they liked better and we still didn't have a formal accepted offer? If we waited on this offer (a definite maybe at best); we would most likely lose the new home they found. The seller is in a bad position, since they don't want to even take the home off the market as a contingent offer in case my buyer walks. One thing I have started using on my listings to resolve this situation is to state that if either the buyer or the seller defaults prior to 60 days from date of the offer, there will be $x paid to the other party. One problem is that the seller typically doesn't have the money if they elect to go bankrupt instead of sell or decide to accept a loan modification instead of selling., etc.

A longer term solution I thought of would be to go back to the days when the banks would accepts a Deed in Lieu of Foreclosure and morph it into the short sale process. If the seller would essentially assign power of attorney to their bank to help liquidate the home (since they can't make any money as the seller anyway) this would greatly speed up the process.

Scenario: Seller is in default and is hoping to complete a short sale. Have their bank prepare a legal document stating that the only way they will begin the negotiation of a short sale is if:

The home does / does not meet the banks initial requirements to be considered for a short sale
They are going to start the foreclosure process by ____ day if seller doesn't fully cooperate;
Seller to acknowledge all liens against the home (first, second, HELOC, tax liens, and delinquencies which may become liens (i.e. HOA dues) and that any undisclosed items are the sole burden of the homeowner.
Seller agrees to execute a limited power of attorney allowing the bank to dispose of the property
Acknowledgement that the bank will / will not seek a deficiency judgement for any debts forgiven;
If the home is still occupied, they agree to vacate and leave the home in it decent condition by the date of sale or else their deficiency judgement will be in full force and effect!

Since the bank has obtained control of the sale:

The commissions would be known up front;
All offers would be sent directly to the bank for approval (this stops the investors from typing up the property and reselling the home if higher offers come in that were never presented to the bank);
Less transactions would fall apart awaiting for the bank approvals;
Buyers would feel more confident the short sale will actually close;
The process should go much faster since it is now streamlined.

Let's work on perfecting a Realtor driven plan that helps fix the short sale debacle! I am willing to take this plan to the NAR Mid Year Meetings in Washington DC in May if it gains enough support. I welcome improvements and modifications to this idea!

Jim Paulson

Jim Paulson, CRS, GRI, EPRO, SFR

NAR Employer Assisted Housing Instructor and EPRO Instructor
Owner/Broker - Progressive Realty Corporation
Specializing in Boise Idaho Real Estate
http://www.IdahoMLStours.com
Http://www.Progressive-Realty.info

Posted by Jim Paulson (Owner/Broker) on 03/05/2010 11:30 AM

Comments (43)

Short Sale Process and Suggestions to Speed It Up! in the Sales Strategies / Tactics Channel

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43 Comments on Short Sale Proposed Solution for Quicker Bank Response Times

MAR

2010

Thanks for information. We learn a lot from Active Rain blogs. Best Regards,

It is an interesting thought...anything to make the process easier....I wonder if it would work??

Sadly, this puts the bank in control of far too much.

It also takes the management of the sale away from the owner and the listing agent is put squarely in the middle.

Bottom line, the owner is still going to lose their home.

Ethical mortgage modification including reduction in principle to market value is the only thing that will save the home owners and the real estate industry.

The banks can take care of themselves because the government will protect them from loss.

So what happens if during the process the seller which lost is job regains employment and is able to ge this life back in line and the bank now offers a loan modifcaiton that was declined in the past due to no income? What an oppurtunity for him and his family to stay in the home and wouldnt it be better for the overall market to have less short sales and foreclosures?

You seemed to be familiar with the banks- do you really think a bank would ever agree to these terms? We can barely get them to agree to a federal required modifcation when the criteria is plain and simple.

Just because the banks take 12-18 months of agreeing to a short sale do you really think a homeowner should sign over power of attorney to the banks? hmmm

I have to think about this. I'm not sure it would be ideal.

JIm. My first thought is banks already have way too much control, But I commend you for thinking about solutions instead of whining about the problem. That's where most people get it wrong. I need to ponder this.

This system is so messed up. Anything would be a help. Getting an answer on these things is pulling teeth.

Jim:

Why on Earth would a seller want to do this and take on the burden of other liens when those liens are wiped out in foreclosure ... or are negotiated away before a ss closes?

I'm not sure giving the banks more control would make sense. I'd like to think it would streamline things, but I'm not convinced.

MAR

2010

I'm all for a streamlined process, but not sure if the banks can be depended on to handle the task. They've not shown such common sense yet. All the while investors like Fannie and Freddie are losing money hand over fist. But no worries, Bernanke will print more.

I'd really love to see the servicing banks bypassed altogether and have Realtors and sellers deal directly with the investors. Just a thought.

Well any solution is a good start and could work but I believe the banks will have way too much control over the transaction...it's bad enough they dictate the process the way they seem fit to do and even though we have some control..it goes on deaf ears with most of them. I think they are confused and unorganized enough. I'm not sure they would even understand your plan.They can't even figure out the easy ways to simplify these problems so I doubt they'll take this one on. They can't even retain qualified people to work in these departments. It's a good effort but I'd be worried that the banks would just have more fuel to leave us and our clients in the dust.

Thanks for making us think about a different option. Sadly the lenders already are controlling the process to the deteriment of the market. Approval of short sales that are being sold at Fair Market Value should be a slam dunk. What seems to be holding the process in check is second liens. As long as the federal backed insurance will bail out their loss they will continue to hold out on approvals. At some point you can not squeeze blood from a turnip. Approve the sale and let our market begin to recover.

Until there are better guidelines put into place, we are really stuck with the current rules of the game!As a Realtor I would not feel comfortable drafting these terms into a contract. Way too much liability.

One of the big problems in short sales is the time it takes. On the listing side I have buyers and their Realtors sometimes finding ridiculous reasons to get out of the contract, and of course sometimes it just takes to damn long and I would be frustrated too. I wouldn't advise a short sale owner to accpet a right of recission after bank approval because my job is to keep them out of foreclosure. However, you point out major flaws in the system that begs for a solution so that that type of provision is not necessary.

On REOs the banks seem to have their act together for the mostpart. It can still be a grueling process, but it is definitely much quicker. Why can't them simply do the same thing for short sales? It can't be that hard.

I'm not in favor of giving banks more control. Clearly their interest is for the bank itself and investor/clients. Our first concern as Realtors is for our clients, putting their needs ahead of our own. Even the brokerages that employ us put the needs of the client before their own. Given that, who would you want to be representing the sale of your home, a Realtor® or a bank?

I think the government should have moved the money directly to homeowners, giving them control with structured guidelines. I'd also be in favor of abolishing HELOCs. I don't believe we'd have had the glut of short sales and foreclosures affecting the housing market. Remember when we could do a CMA without using short sales and foreclosures? I long for the old days when a seller could give a little and still make money, and the buyer could still feel they got a deal. I guess that only happens anymore with estate sales and well, REOs.

A noble idea but as an agent you are working for your sellers best intereat and the bank works for their best interest, MONEY! the only way I would ever consider this is if the bank completely absolved the seller of any and all financioal burden and favorable credit report.

On the back end you are effectively creating another REO which can sit there vacant and deteriorating for what can be years. This pushes the market down further and will continue surpress the market. The banks are only interested in their profit margins which is why the loan modification proigram does not work. I really think that we just have to ride it out. the government won't do anything and neither will the banks.

I am hoping that HAMP and HAFA can do something to helpwith the short sale problem. I like your idea more than both of the governments ideas

Your plan sounds very similar to the new HAFA program. You can view the details and my thoughts here , in short, bad program.

Give servicers/investors/insurance companies more power? No Thanks. They have quite enough already as it is.

Your state contracts sound like they are weak, at best. PA short sale addendum is as well, that is why we don't use it. We got our own drafted by our attorneys. It states neither party can walk on the deal during the specified time period (usually 90 - 180 days). we also collect a non-refundable deposit of at least $5,000, always try for 5% - 10% from the buyer which they agree up front will get released to the seller if they walk prior to the expiration of the agreed upon time frame. This ensures the buyer is also committed to the deal. If they hesitate to agree, than they are not the right buyer for my sellers/listing. At the end of the day, short sales are good deals for buyers, if they are not willing to wait it out, than they should not buy a short sale.

As for the seller not co-operating, I have not come across this. It all comes down to motivation. If you sense they are not motivated, don't take the listing. We have the seller sign disclosures that state up front they will co-operate or they will pay a cancellation fee to my negotiating company. Do they have the money to pay it? I've never had to find out because it is meant to deter any thoughts of not co-operating and since you get it signed up front, if they pause than that would be an indication they are not motivated. We also collect all the necessary short sale package information up front so there is very little need for them to do anything moving forward except wait for an approval.

What seems to be a bigger issue is the lenders are backed up and under staffed. Loss mitigators are nothing more than $15 an hour employees with no real power to make decisions.

#10 above had a great idea. Remove the servicer (essentially, the middle man with no authority to approve anything) and deal direct with the investor/MI companies who are the decision makers and the process would move much quicker.

I know people don't like giving our banking industry any more control, but if the homeowner had done a deed in lieu of foreclosure, they also had to give up the ability to stay in the home until it closed.

Bill, you bring up a good point about if the homeowners situation improves. Maybe we could work in some sort of rescission period that is applicable up to the point of an accepted short sale offer.

Bryant, I would love your additional feedback since I recognize your expertise in this area! I know I am thinking outside the box here.

Aaron, I am not sure I understand your point. Any other liens will be released from the home's title at foreclosure, but that doesn't always dissolve the homeowner's responsibility to pay them.

Kevin, please expand on your thought of dealing straight with the investors. Which investors? Fannie and Freddie or Donald Trump types?

Neal, unfortunately, I agree that many people in the banking industry are under achievers and not competent to deal with the issues. In all my years, I have only been truly impressed twice with someone in the REO world of a bank. I often joke about the REO department being the equivalent of Banker's Siberia.

Cindy, if the banks would just acknowledge their process of approving their Short Sales, at least all parties could know the rules and agree to play or not and know if you are winning or losing and when to add fuel to the fire verses bring out the white flag and surrender!

Sanna, my concept is still a draft. The final versions would definitely be crafted by attorneys complete with addendum's that would be applicable for unique states.

Rob, you are right it shouldn't be that hard. I could draft up a flow chart for any bank and systematize their process pretty quick. There are only so many moving parts in a transaction. If the loan is more profitable to let default and collect on the PMI or MIP, then short sale declined; if it is in bankruptcy it is declined, if there is a first and a second, it goes to the next department, etc.

Brenda, part of the problem with the short sales is that the seller is not allowed to make a dime off the transaction so they can become disinterested since their credit is probably already shot. At least on a foreclosure situation, some banks offer a "cash for keys" so the owner has money for a deposit on their rental. What good does it do to argue if it is better to represent an owner vs. a bank if we can't get it closed? I think your wish of abolishing HELOC's has effectively come true.

Short Sale Pathways, I would like to see the banks absolve the seller in this cooperative venture as well! We need to get the seller and their lender to work as a team if this is going to work. My objective is not to create a back end REO in that the seller stays in the home and works through the sale as part of the partnership.

Stephen, thanks! I was shocked to read one of the guidelines on HAFA that says if we as Realtors buy a short sale, we can not even collect a fee to do so. I can see why the seller can't when the bank is taking a loss; however, why should we as Realtors, not be allowed to collect the same fee on a short sale we buy for ourselves like we would on any other transaction?

Comment #20 deleted since it was trying sell "cheap sexy lingerie". LOL I think I should put a Terms of Service guideline on my post saying that advertising on my blog will result in a $100 advertising fee per view. I wouldn't be able to collect, but it would make my accounts receivable look good so that I could get a loan to buy more homes. LOL

We won't be able to recover until the homes that are currently in foreclosure will be sold to qualified buyers. Help homeowners get out of the hole instead of pushing them further down.

Kevin, when a listing agent does their job like you appear to, short sales are more attractive to the buyer. I have turned down short sale listings since the seller is not motivated. Transparency in the transaction is critical in my opinion in a short sale. Every Realtor has their own ideas of how to deal with additional offers that come in between seller acceptance and bank approval. I like your idea of having the seller pay if they fail to perform on their end. I thought of having 2% of the sales price as a side bet between the buyer and seller so that if either party backed out in 60 days, at least the remaining party got compensated for their time and effort. How and if that money is split between the prevailing party and their Realtor is up to them.

Here are a couple of problems I see with this just off the bat:

1. You are putting the burden upon the banks in the short sale, instead of the person asking for the short sale (the seller).A short sale is a privilege, not a right.

2. Like you already mentioned, a deed in lieu already relinquishes property rights and ownership. So what you are basically asking for is a deed in lieu without the ramifications of a foreclosure.

The real solution was not to bail out the banks. SMIs need to make the demand for efficient short sale procedures and processes from their servicing lenders. With the bail outs, they no longer have the motivation to do so.

We, as real estate agents, should respect property rights. This includes holding the public and the banks responsible for their own situations and allowing free market to dictate the process.

I can't say I support giving any more control to the banks...I am hoping the new short sale guidelines will speed things up...time will tell.

It is not an issue of modification as mentioned above. It is about a better way to do short sales, if you have to do them. I think it is an idea with some merit.

Ya know, it is so hard to decide which way to go here. Short sales are better for sellers and for banks however the ridiculous amount of time that it takes to get these banks to approve a short sale makes them bad for buyers, unless you have a very patient buyer.

If more homes were sold at short sale being that most of them are sold at fair market value then it would benefit everyone. Foreclosures do not benefit anyone, except maybe the Attorneys involved in processing them.

My latest short sale took 3 months just to get the bank to accept doing the short sale at a reasonable value. They ordered a BPO which came in ridiculously high and it took the PMI company getting involved and ordering an actual appraisal to get them to accept fair market value. Once they accepted that and approved the short sale at that value then we began to "roll" on the short sale itself.

Who takes the brunt of the loss however? Can our banking systems continue to handle these kind of losses. We have lost so many banks already.

There must be a workable solution for all - Somewhere - Somehow. Until we find it, none of us will recover/stabilize.

Loan modifications could be a great solution if only the lenders would do them, and do them quickly, and within reason. I've seen to many homeowners who would have been happy to extend their mortgage by 5 years or so if only they could stay in their home, the home they love so much.

I think the best solution is for all of the banks to take the Wachovia lead and actually focus on getting these homes sold.

No matter the "solution" for short sales there will be unintended consequences for the sellers, banks, and buyers. Every transaction is a little different because everyone's motivations are a little different. One size doesn't fit all.

I have transacted short sales from both ends, working with buyers or sellers or both, and I negotiate depending on the individual circumstances of each party. I have found that it is messy no matter how its done.

MAR

2010

Jim, In this case, by investors, I meant the company that actually holds the note. The current set up for most of these defaulted loans reminds me of how a mortgage broker originally funds a loan. Broker is the middleman who ultimately has to get approval from the actual banks underwriter before the loan gets funded. I prefer to deal direct with bankers to fund my loans as I know I am dealing with the decision makers and if my Loan Officer needs to get a complicated deal approved, no one has better access to said underwriters (decision makers) than an LO working directly for that particular bank.

In the case of short sales, the set up appears to be similar(most of the time). The servicer, like the mortgage broker above, is just the middleman that has to ultimately get a short sale approval from the actual note holder. They sign what is called a servicing and pooling agreement. Each servicer has a different agreement with each bank they service the loans with. Because of the volume of defaults, there is no way these loss mitigators at the serivcer company know what the servicing and pooling agreements say for each and every loan. This is part of the time consuming problem. If we could just deal directly with the note holder the deals would go much faster.

As an example, when I get a short sale with say Wells Fargo as the servicer of a note ultimately behind held by Merryl Lynch and it also has Mortgage insurance, those type deals always take longer to do than if the note was actually held by Wells Fargo themselves with no MI. In this scenario, Wells, as the servicer approves it, then it gets passed to Merryl Lynch, the investor, who may or may not approve it, then if approved, it gets sent to the MI company, who may or may not approve it. This process seems to add, at least, another month to the process.

If we could deal direct with the ultimate decision maker it would really streamline the process. But, that is living in a dream world! Slap me back to reality please!!! lol

We have found that the more short sale negotiations we handle the more smoothly they occur as we find tricks of the trade and our identifying who to work with and who NOT to work with. Some are just not destined for a specific buyer who wants to close in 30 days. By representing the seller we can orchrestrate the transaction- what I am seeing is this would be similiar to allowing Realotrs to also be repsonsible for the loan submission during the boom. Can you imagaine?

Here is an interview a few weeks ago- And after hearing this it is more like 15 cooks in the kitchen

http://www.youtube.com/watch?v=WTHUm88efsg&feature=youtu.be

Hot Hint for the day- GMAC just sold a huge 2nd note portfolio to SLS.

SLS

Awesome at getting back within a week but they usually want closed with 30 days or will tack on another 1% of listing price. They always require 10% of note and they never require a BPO. Knowing this we only submit to the 2nd AFTER a week or two of the BPO being completed so we can close within 30. Hope that helps someone next week!

I am surprised to see so many comments saying my idea gives too much control control to the banks. When doing a short sale, they are the ones that "take" control and are the decision maker since the homeowner is effectively held hostage to their lender. The homeowner is reduced to a pawn in this chess game as it is via a short sale, so why not accept that and move forward?

I do agree that loan modifications will help stem foreclosures and I am actively helping people do these. I am also hoping lenders will start doing "shared equity participation loans" on modifications so that if they write down loan amounts, they can get a percentage of their money back when home prices recover.

IMHO, Lenders are spending too much time trying to stop investors from making money and not enough time approving short sales and moving on to the next file. So, I also have a huge problem with your #2 after banks assume control.

The lender may have control over wether they want to accept a short or not but I do not want them acting as if they are the seller and they already hold title. If they want that, let them foreclose and incur the costs involved. If they are going to accept a short sale based upon their own independent valuation, then investor buyers (Trump types) should and do have every right to make a profit. It's unamerican to suggest otherwise. Capitalism has to work for both the big companies/lenders as well as small companies/individuals otherwise it is not capitalism at all, it's Communism!

Lenders and our government caused this problem, why should they be the only ones allowed to benefit and make money?

What about the buyers/investors out here? Who's looking out for them? What about their right to make/EARN (key word is earn) a profit? if not for them, things would be even worse. How many short sale listings do you think would still be for sale if investors did not make offers on them and were willing to wait the 6 months to a year, sometimes more to get an approval? An end user buyer comes in and is willing to pay more only because they do not have to wait to get a clear title. That clear title is worth something is it not? All the effort and time the investor puts in is worth something is it not?

I deal with a lot of cash rehab investors who, like retail buyers, do not want anything to do with short sales because of the time it takes to get approvals. They don't want their money tied up in what if/maybe scenarios. They want to be able to buy and close immediately so they can keep their capital moving and working for them.

The small amount of investors out here who are willing to buy short sales, follow the law and wait it out should be looked at as the saviors and partners in all of this, not the enemy.

MAR

2010

Your plan has my vote

Cash for keys is the process I know of. Get out, here's some money to move. The short sale process is a double edged sword if you ask me. I know how the buyers feel and the sellers. There are many posts in which buyers just give up and take a hike, I can't blame them even though for the most part I'm a listing agent.

MAR

2010

Kevin, I am a self professed "capitalist pig" so I appreciate your comments. The point I was trying to make in #2 is that I don't approve of people just "optioning" the property via a 1 or 2 % earnest money and selling it simultaneously at closing (if possible) at closing. If they don't find a buyer to assign it to, they generally walk and request their EM back. I have zero problem with people that physically acquire the property for a profit!

Lyn, I agree with the cash for keys concept. Why is it the bank can offer a small incentive to vacate the property and yet on a short sale, they are not allowed to receive a dime! I am surprised that in the new HAFA regs, a Realtor can't even accept a commission if they are the end buyer of a property just because it is a short sale.

AUG

2010

Deleted comments 44 and 45 since they were just pull page ads for products full of links for products trying to use the power of Active Rain for their personal gain! I wish I could charge a "hosting" fee for their crap!

AUG

2010

Deleted post #47 since it was for shoes and stimulants.

AUG

2010

Deleted post 49 since it was spam trying to link to a bunch of shoe websites.

SEP

2010

Deleted posts 51&52 since it was spam trying to link to a bunch of boot websites. Time to start charging these companies linking and coop advertising fees!

SEP

2010

Deleted posts 54 since it was spam trying to link to a spam for outside websites. Time to start charging these companies linking and coop advertising fees!

DEC

2010

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Spam Posting fee is due and payable within 7 calendar days the spam is posted to this blog. Money orders or cashiers checks are to be made payable to "Jim Paulson / Progressive Realty", 645 Wickham Fen Way, Boise, Idaho 83709. Any late payments will be subject to the highest rate allowed in the state of Idaho (including compounding of payments and interest not yet paid)!

I have reported and deleted 32 of their spam emails on this blog effective this notice so it is clearly evident that with those deletions and remarks posted above that this sort of spam is not welcome on this or any other of my blogs! Constructive notice has been given about the potential adoption of this policy on August 02, 2010.

DEC

2010

Merry Christmas too me! UGG has just become my first subscriber to my $500 posting fee offer as post #72! Screen Shot taken, now to delete them since I have fulfilled my part of the contract! LOL

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Jim Paulson (Owner/Broker)

Boise, ID

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Progressive Realty (Boise Idaho) www.Progressive-Realty.info

Address: Boise, ID

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Jim Paulson is currently the Past President of the Ada County Association of Realtors. I try to use this experience coupled with my 20 years being a licensed Realtor to help bring you relevant information and hopefully an occasional thought provoking idea or two. I am a member of the Greater Boise Chamber of Commerce and and Accredited business with the Better Business Bureau. I can help with Idaho Foreclosures, Boise Idaho Short Sales, building a new home, or even using First time home buyer grants and niche lending prodcuts to buy or strategically sell homes. I am here for your real estate marketing needs! http://www.IdahoMLStours.com Http://www.Progressive-Realty.info Virtual Tour Inventory Widget

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