Thoughts on Short Sales, Late Payments, and Strategic Default

Have you ever had a client ask you if they could participate in a short sale without missing a mortgage payment?

If so, how did you respond?

Prospective short sale sellers that are still making their mortgage payments are often curious about whether they could successfully receive short sale approval on their home without ever missing a payment.

Clearly those folks are a little different from the faction who are unemployed or underemployed and can barely make ends meet. These are borrowers facing imminent default or those out to sell their home for other reasons. Often borrowers still making their mortgage payments have a strong desire to preserve their credit.

So, the question is, “Can you participate in a short sale without missing a mortgage payment?”

The answer is simple (read: sarcasm): Yes, no, or maybe.

There are certain short sale lenders that will approve a short sale with no missed payments—especially for those short sale sellers facing imminent default. There are other lenders that will not. And, to even make it more confusing, remember that all of the big servicing companies (Bank of America, Chase, Wells Fargo among others) service loans for hundreds of investors—each with their own guidelines for short sale approval.

So, what does that mean for you and to your business? It means that even if one B of A short sale got approved with no late payments, it’s possible that the next will not. Each short sale seller’s loan is owned by a different noteholder, and it is the noteholder guidelines that control the decision-making process.

In 2012 alone, we have seen a handful of short sale sellers that have been told that their short sale will only be evaluated if the borrower is 60 days late on the mortgage: we’ve seen it at B of A, we’ve seen it at Wells Fargo, and we've seen it at IndyMac. Heck… we even received a conditional approval the other day from PNC that said that the short sale approval letter is conditioned upon the seller missing two payments. However, the negotiator did do a solid for the short sale seller; she pushed the closing date out 65 days so that now the seller can go late.

The bottom line is that there are many unknowns with short sales. Often times experienced agents and short sale processors can surmise how things will probably happen based upon their previous experience. However, with all of the continuing changes in the distressed property world, you really never know.