All - I'm no expert in credit scores either.  However I do have some experience in reading credit reports as I've been a Loan Officer for the last 5 years and analyze these daily.  I do have a question that I can't seem to find the answer which brings me to this website.

1. If you maintain good credit standing with the lender that has your mortgage and all other creditors on your credit report, how much will a short sale affect your credit? 

I ask this because I cannot find the answer anywhere on the internet.  All the info seems to be outdated since President Bush signed the Mortgage Forgiveness Debt Relief Act at the end of 2007.   I am in a hardship due to lower income.  My job forced me to relocate and our home values have dropped below what I owe on it.  I can't rent my house out either because our Home Owners Association doesn't allow rentals.  I'm living with in-laws but don't know how long that will last and is why I'm seeking credit advice.  I'd like to maintain the best possible credit score through this.  

It seems like a Short Sale would have no affect on credit score if you maintain your payments up until the transaction is closed. 

If anyone can offer any advice, then it would be greatly appreciated.

Thanks,

G 

What you stated in your blog and the question that you posed seems right on target. What we have found in counseling, educating and assisting consumers in making decisions on how to proceed when they're either facing a choice at the end of the month as what to pay (as they can no longer pay both their new mortgage payment and their other financial obligations) or are looking to pick up the pieces of their life after a foreclosure.. is that it is on a case by case scenario. Taking each individual's or family's circumstances into account along with the policy of each lender as to the flexibility that they have in resolving a delinquent account or how they treat a short sale or deed in lieu.

We have found that prior to a foreclosure, all of the solution oriented options are on the table. Utilizing a holistic approach and having a homeowner that is motivated to keep their home, we have found that there are alternatives and the lenders are cooperative so everyone is whole at the end of the day. If it must go in the direction of a short sale/deed in lieu/foreclosure it really depends on the policy of the lender as to how it is treated, forgiven, reported and the resulting blatancy of the derogatory.

We have experienced the full spectrum from a deed in lieu being totally forgiven and not reported to credit reporting agencies to a consumer being not only reported to credit bureau but getting a tax statement as well for the difference being treated as taxable income to the ex-homeowner as a result of the deed in lieu or the short sale and what was really owed to the bank. Either way, it is not favorable if it is reported as forgiven or settled. A foreclosure is of course a major derogatory but just like bankruptcy or anything else, it really comes down to successes and payment activity of the individual/family after the disaster and the policies and tolerance of the respective bank/lending institution.  

Steve

pres@anewhorizon.org http://www.anewhorizon.org/  

Hi Richard,

       I have been reading some of your posts about short sales and I am in a peculiar position. First, I have 2 homes up for short sales, one I lived in and the other was a investment property. Both have renters in them, and I have no late mortgages ever!! I have a lawyer involved and he said that I may take a 0 - 20 point hit on my credit bureau report for each house. I did ask him after I accepted a contract from a buyer on either home, submit the contract to the bank for them to agree on the sale, and if agreed "negotiate for a paid as agreed on my credit bureau report". He did not respond to that but continued to say that I may take a hit.

       I do not want that for the simple reason we (wife and I) have exhausted all of our savings and majority of 401k's to keep mortgages current when the houses were empty (looking for a renter), taxes paid and overall maintanence of the property. We even tried to negotiate a different terms early last year, but the lender would not agree. Yes, we did get into a negative amortorization (yes the broker got me gooood!!) on both properties. We could never re-finance so we have no other alternative but to do a short sale. I feel like a fool for getting this type of loan (even though our scores were in the 740's) and feel even worse that the lawyer is not listening to me. I know now that I can negotiate how they report it on our credit bureau reports, told the lawyer we want that to be in the negotiation process, but this is the stickler. Both homes have 2 contracts on them and have been submitted to each bank. What should I do for a lawyer who is not listening?!?

Richard,

We have a home for sale and due to the fall of Michigan housing market we now owe more than it's worth. We have a buyer interested, however we will be short 25K on the 2nd mortgage.

We have excellent credit scores in the upper 800's an want to keep it that way. We are trying to negotiate with the bank to continue to make payments on the shortfall.

How will this effect our credit? Will it hurt us the same as people who don't pay back their shortfall, if so, it does not give much people incentive to pay it back.

We've worked hard to build our credit and we have never been late on payments. Do you have any suggestions on how we can get our house sold w/ a shortfall and have it not effect our credit if we agree to pay it back over time?

Thanks,

Richard

I am in the exact same situation as Richard.  I've not called the bank yet, but I hope they can roll the short amount into some type of payment plan.  I've assumed it would simply be a personal loan with the bank.  My lender is Wamu. Has anyone successfully done this with Wamu?  I too have an 800 plus score and want it to say there.   

If you're willing to actually pay WaMu the balance owed on a house you no longer own, they'll jump at that like a hen on a bug.  You must, however, obtain confirmation in writing that if you repay the note in a timely way, they will not report you to the CRAs.  If they trash your credit, what's the point of paying them?

Sidney, can you provide a credible citation to corroborate what you said above?  Thanks.

I thought maybe you read it elsewhere, for which you could provide a URL.  I always like to read the long version of statements such as yours.

Richard, I would insist on a promise in writing from the lender that if the borrower pays off the deficiency in a timely way, the short sale will be reported as "paid as agreed; never late" to the bureaus.  Then, if the lender reneges (it's been known to happen!), the borrower can send evidence of his lender's promise, with evidence of his timely payments, to the bureaus and plead his case for accurate reporting.

If you agree to continue paying on a substantial debt incurred from a property you no longer own, it might be a good idea to pay for an hour of an attorney's time to review your agreement with the bank and have him/her negotiate the best possible terms (including positive credit reporting) before you sign the paperwork.

National Association of Consumer Advocates -- Find a Lawyer

http://members.naca.net/findanattorney.php

Absent an agreement in writing that the lender will refrain from reporting the short sale as Score Factor Code #22--"serious delinquency, derogatory public record or collection" [which is what a short sale is]--I wouldn't pay the deficiency.  Agreeing to pay the deficiency should get you something valuable in return; namely, a clean credit report.

Sidney, I can state without fear of contradiction that "paid as negotiated" won't work if one expects to be approved for a loan in the near future.  These words are an immediate red flag to any underwriter, upon which he or she will condition as follows:

Borrower to provide explanation for notation on credit report "paid as negotiated."  

If the subsequent explanation is "lender agreed to monthly payments in exchange for approving a short sale," the seasoning requirement of a short sale (minimum two years) will apply.

If you can negotiate "paid as agreed; never late," you're golden.

** Again, it is important to say that the short sale in itself will have minimal, if any, affect on the credit score. **

I can't disagree more strongly and I hope you will not mislead the public by insisting that a short sale has minimal, if any, effect on one's FICO score. I took great pains (above) to explain Score Factor Code #22.  Unless you can negotiate a "paid as agreed; never late" notation, a short sale will have as much impact as any other derog that generates Score Factor Code #22.  FICO scoring algorithms are binary--that is, a credit score is a numerical expression based on a statistical analysis of a person's credit usage.  If the lender, regardless of what you negotiate, uses Score Factor Code #22 to report a short sale--as most if not all of them do--all the verbal promises in the world aren't going to mean anything.  One must understand how credit scoring works to negotiate an effective written promise in exchange for full and timely repayment of a deficiency.  That's why you must get the promise in writing, so that you can at least present that to the bureaus to FORCE them to change the way the trade line is reported.

In my 20+ year career as a loan originator, I've seen hundreds of loan approval conditions.  If notations on one's credit report say anything BUT "paid as agreed" (not paid as negotiated, etc.), the underwriter will require an explanation.

Since this thread started back in March, Fannie/Freddie have modified their seasoning requirements for pre-foreclosure (short) sales.  Here's the link...

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf

Here's the pertinent section...

Establishing a new policy for preforeclosure sales.  A preforeclosure sale involves the 

sale of the property by the borrower to a third party for less than the amount owed to 

satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage 

insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is 

establishing a 2-year elapsed time period for reestablishing credit following completion 

of the action.   

Therefore, any mention of "negotiated" or "short sale" or "pre-foreclosure" or "debtor paying on balance" or any manner of characterizing the trade line--there could be dozens of ways of expressing it--as other than "paid as agreed" will trigger further explanation.

** Again, it is important to say that the short sale in itself will have minimal, if any, affect on the credit score. **

I can't disagree more strongly and I hope you will not mislead the public by insisting that a short sale has minimal, if any, effect on one's FICO score. I took great pains (above) to explain Score Factor Code #22.  Unless you can negotiate a "paid as agreed; never late" notation, a short sale will have as much impact as any other derog that generates Score Factor Code #22.  FICO scoring algorithms are binary--that is, a credit score is a numerical expression based on a statistical analysis of a person's credit usage.  If the lender, regardless of what you negotiate, uses Score Factor Code #22 to report a short sale--as most if not all of them do--all the verbal promises in the world aren't going to mean anything.  One must understand how credit scoring works to negotiate an effective written promise in exchange for full and timely repayment of a deficiency.  That's why you must get the promise in writing, so that you can at least present that to the bureaus to FORCE them to change the way the trade line is reported.

In my 20+ year career as a loan originator, I've seen hundreds of loan approval conditions.  If notations on one's credit report say anything BUT "paid as agreed" (not paid as negotiated, etc.), the underwriter will require an explanation.

Since this thread started back in March, Fannie/Freddie have modified their seasoning requirements for pre-foreclosure (short) sales.  Here's the link...

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf

Here's the pertinent section...

[quote] Establishing a new policy for preforeclosure sales.  A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action. [end quote]   

Therefore, any mention of "negotiated" or "short sale" or "pre-foreclosure" or "debtor paying on balance" or any manner of characterizing the trade line--(there could be dozens of ways of expressing it)--as other than "paid as agreed" will trigger further explanation and, based on the explanation, seasoning.

Sorry for the duplicate post, but please allow me to add:

All lenders that sell loans to the Government Sponsored Enterprises (Fannie/Freddie) in the secondary market are guided by "reps and warranties" whereby they MUST report the trade line truthfully to the Credit Reporting Agencies or risk losing their correspondent status with the GSEs.  Do you know of a lender that would risk such a dire outcome in order to preserve a borrower's FICO score?  Unless the GSE knows about a previous pre-foreclosure experience with a consumer, how will they know they're being asked to fund a loan to a consumer who previously didn't pay as agreed?

Again, unless and until you get an agreement in writing as follows...

"Lender will not report this trade line to any Credit Reporting Agency in any manner that is derogatory in any degree.  Specifically, it is agreed that the trade line will not be reported as Score Factor Code #22 or its equivalent.  As long as payments are received in a timely way, Lender will continue to report this trade line as 'paid as agreed' each month."

...there's no point in agreeing to pay a deficiency.  No point whatsoever. 

Here's what I'm saying and let me know if I'm still not clear.

Let's say a shorting lender gives you an approval and, pursuant to the parties' agreement as memorialized in the short sale approval letter, reports it to the CRAs as "paid as negotiated."  The word "negotiated" will prompt a subsequent underwriter--assuming the consumer is seeking a new loan before 24 months seasoning of the instant short sale--to condition for an explanation of the word "negotiated."  In that case, what good has it done the consumer to agree to pay the deficiency if a subsequent lender still penalizes the consumer via 24 months seasoning?

Also, if Score Factor Code #22 was used to report the "paid as negotiated" item, that's just as bad as a serious delinquency because the same Score Factor Code describes (1) serious delinquency; (2) derogatory public record or (3) collection [which is what a short sale is].

There's also the matter of "recency, frequency and severity" and is discussed here.  => http://tinyurl.com/6lbhok

If you've successfully negotiated a short sale where the trade line was reported as "paid as negotiated" AND the former homeowner was approved immediately (under 24 months) for a new loan, then what I've said is hot air.  If not, then you've negotiated...well, nothing beneficial, because the consumer is still paying the piper due to the fact that he cannot get a new loan for 24 months.

Anything other than "paid as agreed; never late" is false security, in my opinion. 

Your mention of "buy and bail" is a different matter altogether and is discussed here. => http://tinyurl.com/58kxp9

If you, Sidney, can negotiate a short sale that results in no consequences whatsoever--(1) no seasoning issues and (2) no hit to the borrower's FICO score--you should get a job as a hostage negotiator because you've got some brass you-know-whats.  :-)  In my experience, I've never seen or heard of a lender that will agree to a short sale--even when the borrower agrees to make the lender whole over time--without some impact to FICO via Score Factor Code #22.

Sidney, how do you get around pesky Score Factor Code* #22--"serious delinquency [30/60/90/120 days late on mortgage], derogatory public record [foreclosure, BK, NOD] or collection [short sale]" when each of these actions bear the same weight against other credit behavior?  When #22 is first of four Score Factor Codes, it carries 35% weight.  In other words, Score Factor Code #22 cannot differentiate between the various types of derog; the algorithm knows only that there's a derog.  To borrow a phrase, "A derog by any other name would smell as bad."  http://www.bankrate.com/brm/news/mtg/20000524.asp

Fannie and Freddie may not have explicitly listed "short sale" but LENDERS lump short sale in with FC, DIL and forbearance.  There's not a single lender out there that looks at a short sale and says, "Oh, well, it was 'only' a short sale."  Even though the lender recovers more via short sale than foreclosure, they still took it in the shorts and--guess what--they don't like it.  If there was a way to post a few underwriting guidelines, you could see and understand the correctness of my statement.

In my capacity as a loan originator for 20+ years, I also conducted credit repair workshops for years and years.  I've seen (literally) hundreds of credit reports and gone through the "before" and "after" cleanup with workshop attendees.  I now negotiate short sales, too.  I'm not speaking from theory but from practical application. If (a) a person's credit behavior is otherwise pristine and (b) they negotiate a short sale and (c) even if the mortgage trade line is reported as Score Factor Code #22 (which it will be), their "fall from grace," so to speak, is not as severe and will buttress the hit to their score.  It's the difference between falling out of bed from the bottom bunk vs. the top bunk.  Since there's no other way to report a short sale except Score Factor Code #22, how can mortgage lates be any different than a short sale?  On what basis would lates be different than a mortgage trade line going through the short sale process?

It might be interesting for you to write to cbhelp@fairisaac.com .  Those helpful people will field your question and call you to explain how Score Factor Codes work.  Understandably, they won't respond in writing, but if you leave your phone number, they'll call you back.  They will tell you flat out that if the short sale is reported as Score Factor Code #22, the impact will be EXACTLY the same as mortgage lates, a BK or foreclosure.  If the short sale is reported any other way, the impact may not be as great, but I can't imagine what the other way might be, can you?

http://www.bayhouse.com/FairIsaac-NextGen-risk-factors.shtml

* Sometimes called Score Reason Codes

In every contribution in this thread, my point as well has been that short sale is preferable to foreclosure if only due to more favorable seasoning.

No, I'm not assuming that all homeowners are delinquent when a short sale is negotiated for them.  However, if you, Sidney, are able to obtain short sale approval AND a "paid as agreed; never late" reporting at all three bureaus, such a result is indeed a friggin' miracle, in my opinion.

I agree that most short sales are unbeneficially negotiated.  How are you able to negotiate a "paid as agreed; never late" reporting with a short sale? What is the "certain attention" that you pay to obtain this miraculous result?  What is the "that detail" that has given you the results you have so far enjoyed?

Are your nearly unheard of results and the means you take to achieve them a trade secret?  :-)

I've been trying to find anyone who can help me with my upside down situation. I have specifically been asking all of the "short sale experts" how I can get rid of my home and still pay the difference to the lender without suffering any negative credit hit. I've even met with attorneys who will not engage with my lender or even answer if it's possible without retaining their services.

Our credit scores are unblemished and are in the very high 700's to low 800's. I'm willing to suck it up and pay the difference between the selling price and what is owed (about 100K) over time.

I don't see why this is so hard to find someone willing to tackle this and negotiate with my lender. You'd think the banks would jump at someone trying to pay back everything that's owed to them.

It's like I have some disease for wanting to make right on my loan instead of just walking away. The mortgage broker "experts" I've spoken to will not even return my calls after I propose this to them. What's the incentive for me to cover the difference if it's going to negatively ruin my credit anyway? Looks like I was a fool for actually putting down over 20% initially and continuing to make my payments on time.

Upside down mortgage? The world is upside down nowadays.

Richard,

Thanks. I know it's possible, it's finding a competent attorney to assist with the process proving to be difficult. I'm in San Diego, so if you know anyone...

As for the "big ding", that's almost exactly how I described my proposal to the people I've spoken to thus far. I used the same approach in court the other day for a traffic violation. The judge asked me if I wanted to pay the fine and/or go to traffic school. I said neither. She looked at me with a bit of scorn in her expression and I explained that I would prefer her to suspend the sentence for one year provided I get no other moving violations and if I did get another ticket, that I would pay five times the current fine. I argued that if it was indeed the purpose of a citation to encourage good driving practices that the message was received loud and clear. She then looked at me like I was crazy but then agreed to simply suspend the sentence for one year even without my offer to pay 5x the fine and complimented me on my creativity. I got a couple of high five's from the others on the bench waiting their turn as I walked out.

Back to real estate...I believe my situation although unique as you stated will become more commonplace and that new options more readily available and understood by all parties shall emerge. Maybe I just need to wait this out a bit longer and see where it goes.

Mitch, when I get a minute, I will post two California attorneys who can help you.  I must look for their contact data.

<!--StartFragment-->

<!--StartFragment-->

Mitch, here are two:

Law Offices of Steven C. Vondran

California Clients

620 Newport Center Drive

Suite 1100

Newport Beach, CA 92660

Phone: (877) 276-5084

Arizona Clients

2415 E. Camelback Road

Suite 700

Phoenix, Arizona 85016

Phone: (877) 276-5084

Maurice Kempner

http://mauricekempner.com/Resume.html   

Norma, Richard said, "In fact, I place the majority of the blame for the meltdown on brokers and realtors."  Generally, attorneys have nothing to do with acquiring real estate, and so they had nothing to do with the meltdown.  Richard is just stating the obvious.

Of course people have options other than short sale.  The ONLY advantage to a short sale is that the seasoning period for short sale is two years whereas it's five years for foreclosure or deed-in-lieu.  In addition, absolutely no one needs a realtor to do a short sale.  A homeowner can contact any number of investors who will buy their home through a short sale.  I am one of them.

If an investor is doing the negotiating it is like letting the wolf herd the sheep - the investor is looking for the lowest price from the bank (which is contrary to the best interest of the distressed homeowner). 

Richard, that was me who commented above without filling in my name.  Sorry.

This thread topic is about short sales.  If an investor is negotiating, of course he's going to negotiate for the lowest amount.  The homeowner gets ZERO, anyway, so how is the investor negotiating aggressively contrary to the best interest of the distressed homeowner?

It's a given, in my opinion, that every conceivable remedy that is beneficial to the homeowner will be examined and pursued.  Not every distressed homeowner can be helped.

Yours is a thoughtful response, Richard, and I thank you for making it, but with respect to a short sale--in which the homeowner receives zero at the point of transfer of ownership--how does the investor negotiating the lowest possible amount with the lender do a disservice to the homeowner?

Pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, if the house was/is the homeowner's primary residence, there's no tax due on the "phantom" income from debt forgiven.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

I personally have never negotiated a short sale where the deficiency was not waived.  I can't speak for others.

With all due respect for your unbiased--riiight--participation in a short sale transction, I disagree with you, Wendy.  Realtors add 6% friction to the short sale transaction, thereby making it less--not more--likely that a bank will accept the offer. Let's not forget to mention that a realtor's only involvement in the transaction is to procure a commission for him or herself.  An investor also "views the whole market, pricing trends, and the buyer's likelihood of staying in the deal; after all, the investor IS the buyer.  What possible difference could it make what the homeowner's house short sells for?  When it's all said and done, the homeowner receives ZERO.  Let's see...realtor = $$  / homeowner = 0.  Sounds like an investor, doesn't s/he?

<!--StartFragment-->

Richard, I notice a common theme in your blog responses that ONLY an attorney can protect the rights and interests of the homeowner.  :-)

I'm teasing you, but the practical reality is that, yes, the Mortgage Forgiveness Debt Relief Act of 2007 applies to the four instances you cite:

1.  Must be the property owner's primary residence;

2.  Is limited to the indebtedness used to purchase the home (except when cash out proceeds were used to upgrade the property and can be documented);

3.  Investment and second homes do not apply.

4.  Refinanced mortgage amounts over the original purchase money mortgage do not apply (except when cash out proceeds were used to upgrade the property and can be documented).

However, there's no good reason why an investor's participation cannot serve the homeowner just as altruistically as you seem to believe you do.  For example, my approach is always:  "Mr. Homeowner, what do YOU want to happen?  What is YOUR desired outcome?"  Then I try to facilitate that outcome.  If for whatever reason no alternatives are possible, I buy the home, and pay the least amount that I can negotiate with the bank.  What's the difference if the homeowner's bottom line is compromised by (1) attorney's fees; (2) realtor's commission or (3) investor's profit margin?  With respect to a short sale, the homeowner gets ZILCH at the end.  Yes, some calculations are in order to determine which of several outcomes affect the homeowner the least financially.

Here's a case in point:  Homeowner wrote to me to say that she was being pressured by not one but two realtors to list her property for sale.  Here is her email to me.  Names have been changed for no good reason except that I'm a nice guy.

[quote] In case I forgot to tell you, I am the President of the Main Street People Pleaser’s Association and that is exactly what is happening to me in this real estate adventure with Denise the Bully Realtor.

Denise puts thoughts and promises in my head, those thoughts turn to Joan [homeowner] thinking dollars and then Joan is so easily manipulated right now into making decisions which unfortunately are not in my best interests.  Or I “people please” Denise because I don't like confrontation.

Here's what is happening with the listing and I need to know without question, my rights as a seller of my home. 

Denise the Bully Realtor signed me up for a listing for my home back in June of 2008.  I had been battling severe migraines lasting 10 days to three weeks causing nausea, etc., during the spring and summer of this year.  On Monday July ??, 2008, Denise was due to photograph my home and be here at 8:00 a.m.  I was sick the night before and called her and left a message asking her not to come because I was in bed with a headache. Denise came over anyway, (oh, and I left another note on the front door of my home that I was sick…same message as on her phone), she ignored the note on the door, came in with the key from the lock box and proceeded upstairs to where I was sleeping in my daughter’s room.  My friend Kyle greeted her on the stairs and asked if she, Denise, saw my note.  Denise did not say hi, how are you, just……”where’s Joan”??  Kyle again asked her if she saw my note and she again and again said, “Where’s Joan”? 

Kyle finally reminded her what the note said and that there would be no photo shoot and that I was very sick.  In response, she, Denise, stormed out my front door, took her sign and lock box and I didn’t hear from her.

I waited three weeks and still no call from Denise so a friend referred some guy Patrick from Any City and he called to get my listing.  I told Patrick what had happened with Denise and that I had signed a prior listing.  Patrick came over anyway and had me sign another listing.  I again reminded Patrick that he needed to talk with Denise because she had already taken a listing.  He said for me to call Denise but I told him to please take care of it.

Mistake Number Two: I signed a second listing and Patrick put no exceptions as far as getting a release of the listing from Denise the Bully Realtor before activating the new listing.  Patrick put me in the middle of the biggest battle or, I should say, I put myself in the middle of the biggest battle and hence is the story of my listing. 

Denise the Bully Realtor's broker got angry because Denise did nothing to advertise, open house or realtor preview, nothing to market my home.  In fact it seemed she did everything NOT to market my home.  Because Denise was fighting to get the listing back, she never let up and took it upon herself to get the legal department of Bully Broker involved with the legal department of Patrick's Broker to get the listing on my home back.

In fact, all of this new stuff with her having the listing started with my email, three weeks ago, asking Denise to come and get her sign and lock box and that I was not moving forward with anyone.  I continued this email and the next thing I know she has her legal department involved.  ”Put a little guilt on Joan”- type thing.  Denise is telling me that they have gotten a release from Patrick and that she, Denise, can now move forward to sell my home.  This is all great but she is three months too late.  None of Denise’s actions took place until I asked her to remove her lock box and sign.

So now I get a call from her broker last week with 45 minutes of dialog on why I need to sell my home and how they can do this immediately and the next thing I know, unannounced, Diane shows up at my door on Friday at 12:30 and starts moving furniture and scheduling open houses and broker previews and wants to drop the price. [unquote]

I'm not making this up!  I received this email just this morning!  So, you see, whether an attorney is vying for an hourly fee, a realtor is vying for a commission or an investor is vying for a potential profit, the homeowner has no one who doesn't want something out of the deal.  The best the homeowner can do is determine what she really wants to do and discern who can best help her achieve that (and only that) result.

In my case, I can do anything she wants to do.  I can buy her house through a short sale (if her lender agrees).  I can modify her current loan (if her lender agrees).  I can get her a hard money loan.  I can list her property.  Whatever she wants to do; makes no difference to me.  I guess you could say I'M her best choice.

Sidney and Richard:  No, I would not be willing to pay the lender "the amount they want."  Who does that?  Not even a retail buyer.  Is there a single offeror who accepts the bank's first counter-offer?  I doubt it.  Furthermore, so far, in negotiating short sales, I have not yet had to present to the homeowner a lender's request to sign a deficiency note.  If I were to be presented with that requirement, I would flatly refuse and consider myself not a very good negotiator.  Like you, Sidney, I've been successful in avoiding that outcome.

Insofar as whether a realtor or an attorney is a better choice for the homeowner, we'd have to get out our calculator.

Current balance owed:  $600,000

Current market value as determined by BPO:  $400,000

Negotiated short sale:  $360,000 (92% of BPO per Fannie Mae guideline)

Possible deficiency: $240,000 (600000 minus 360000)

Attorney negotiates $360,000 short sale price (to be paid by a new retail buyer with a realtor involved)

Realtor sells for 92% of BPO = $360,000

Investor purchases for $360,000

What's the difference?  How does an attorney or realtor make things better for a distressed homeowner?  Yes, I admit, if there's a silver lining here via realtor or attorney, I'm not seeing it.

Wendy, I get connected to a lot of my short sale prospects through for sale by owner signs.  For whatever reason, the FSBO homeowner doesn't want a realtor involved.  If I buy the property, the homeowner need not deal with a realtor--(not all of them are very nice, as illustrated in my previous post, a result of starving, I suppose)--and ALL realtors see themselves receiving a commission as the ONLY solution.  Can you assist the homeowner in a loan mod, if that's possible?  Can you buy the property outright if that's a solution?  Can you refinance the homeowner if that's possible?  No...your ONLY SOLUTION is a commission-based transaction. (You can refer them out for other solutions, I suppose, but not if you're starving.)

Sidney, you said, "In the example you gave above you showed the same example I have been saying, if the 360 is market and you're willing to pay market then you have a deal."  Let's make a distinction between "market" and "current appraised value" which encompasses market value.  I said I MUST buy the property at a discount, and $360,000, in the example above, IS a discount. Even you, a realtor, must get a discount if you hope to sell retail in the current environment.  I don't know too many buyers willing to pay full sucker price, do you?

Again, I don't see how a realtor or attorney offers a benefit to the distressed homeowner over selling to an investor.  In all three cases, the homeowner receives nothing at a short sale closing.  If the transaction is not covered under the Mortgage Forgiveness Debt Relief Act such that the homeowner will receive relief of income tax liability, the benefit of using a realtor or attorney is offset by their fees/commission, in my opinion.  Again, a calculator is necessary.

How, then, do a realtor's or attorney's services benefit the homeowner over an investor?  So far, I'm not seeing a benefit.

Sidney, "sucker price" is buying a home at the top of the comp range.  Do you know any buyers willing to do this when there are 12+ months of inventory in most locales?

By whom are you "certified" as a Distressed Property Expert?  I've never heard of this but, then, I haven't heard of everything.

You said, "As a Realtor and Certified Distressed Property Expert, I can offer my clients other options that do not include the sale of that property."

Like what?  Do you personally provide these options or do you refer the homeowner to others who provide those options?

You said:  The mention of a commission as the only driving force for the Realtor and lawyer is quite amusing when you take into consideration the the investor is looking to make substantially more than a Realtor or lawyer would in a commission.

Oh, I don't know about that.  I know many SS investors who make LESS than a realtor would.  If they do enough volume, they're fine with that.  I don't know how much attorneys charge for their services--whatever they might be--so I can't comment on that.

The point is, why are investors looked upon as lesser players when they, too, like the attorney and realtor, are seeking to make M-O-N-E-Y in this unfortunate situation? Let's not be disingenuous.  Your motive, unless you're working pro bono, is M-O-N-E-Y, just like the investor.

Sidney wrote:  As a matter of fact, if we don't get an offer close to market value then we strongly suggest to the buyer that we don't accept a low offer.

So you don't merely suggest...you "strongly" suggest.  Oh, well, then.  :-)  If you don't receive a full appraised value offer, then what?  The house goes to foreclosure?  Kewl.  

I guess what I'm saying is that because the homeowner gets ZERO at the end of a SS transaction, the main goal is to (a) conclude a short sale so as to ensure preferential treatment by future lenders (2 years for SS vs. 5 years for FC).  It hardly matters how the person who facilities such a sale labels him or herself.

I really don't see what a realtor does for a distressed homeowner that can't be accomplished by an investor.  In both cases, the home is sold and the homeowner nets zero.  If the home is the homeowner's primary residence, the outcome is the same--realtor or investor.  Everything else is window dressing, in my opinion, including "certification" as a "distressed property expert"--by a realtor trade association, no less!  As the kids say, "BFD."

Sidney wrote:  you should be aware that those two numbers could be off a bit.

Off quite a bit?  Why would a retail buyer pay anything but appraised value or less--considerably less?  No buyer is going to pay MORE than appraised value; indeed, in today's market, even the most naive buyer expects to pay considerably less than appraised value.

I'm sorry, Sidney, but I'm not impressed with your newfangled designation and I can't imagine that anyone would be; hence my comment "BFD."  Please don't take it personally.  I see your trade association is pulling out all the stops to enhance the realtor's role in today's marketplace, and that's a good thing--for you.  It doesn't help the distressed homeowner one iota.  It doesn't put a single net dime in his pocket.

In my opinion, the designation "Certified Distressed Property Expert" is an attempt to justify paying a commission to a realtor when all the distressed homeowner wants to do is get the heck out of Dodge. Anyone--realtor or investor--will do their level best to get the short sale lender to accept as low a price as possible.  Are you saying you negotiate with the lender to net the LENDER the highest amount possible?  Why?  Since the distressed homeowner receives ZERO, how does the highest price to the LENDER benefit the distressed homeowner?  You said you successfully negotiate "no deficiency" short sale approvals, anyway, so how does the highest net to the LENDER benefit the distressed distressed homeowner?  I don't get it.

Also, it's nonsense that an investor gets "only one shot to get the deal done."  I've participated in several rounds of counters until the deal gets done.  I wouldn't pay anything but a discount from market and neither would a retail buyer.  Again, what does a "Certified Distressed Property Expert" bring to the table?  Nothing that I can see, but you can continue to try to sell me on it.   :-)  

If anyone thinks a realtor isn't in the deal for a commission is naive.  What does the homeowner get for your participation in the deal?  Money in his pocket? No. Two years seasoning vs. five for foreclosure?  Yes, but he'd get that with investor participation, too.

What, then, does a realtor provide the distressed homeowner that anyone else buying his property does not?  How does the highest net to the LENDER benefit the distressed homeowner?

You have made no point whatsoever and I certainly haven't made your point "single-handedly."  Again, unless you can point to a distinct benefit to the buyer by a realtor's participation, you're simply disingenuous.  There is no benefit.

what about short refi ---- i mean i am current on the mortgage and never late, and working on a short refinance and keep the house ----would that also affect my fico???

I just recently went thru the short sale process.  Like most people here I wanted to know BEFORE hand how this would affect my credit and you hear 900 different stories. My first thought was to just let the house foreclose, and love essentially "rent free" until they kicked me out.  I know that sounds awful, but it was the honest to God truth.  As I started researching the short sale process it made me feel better than walking away.   IF you are wondering why I was selling to begin with - I was up for refinance, owed $270K on a house that would appraise for only $190k.  Not because I had taken all the equity out - but I bought at the height of the market and was in a neg am loan.  I would have love to have kept my home, but a bank wont lend on what it wont appraise for - and I certainly didn't have 80k to lay out.

 I had a 1^st and a 2nd mortgage.  The sale took place in August and everything is now listed on my credit report. My 1^st mortgage is listed as "settled for les, never late" and my second states "never late/charged off." While I am paying a deficiency back to my 2^nd mortgage holder - until it's paid off, it will read as "charged off".  My situation is a little different and I never missed or was late on any payments.  My credit score pre-short sale was 807 and is now 740.  This is considered C paper, NOT good, but NO where near what I have seen foreclosures do to friends.  I am just one example but wanted to share my story; as when I was going thru it, I wanted a real life example.  I have been told the reason mine did not suffer as much was due to the fact I was never late on any payments and have never in my life been late on any credit accounts.

Again this is just how it has effected me. I haven't noticed any changes in any of my credit allowances and have even been approved for $3k at American Signature Furniture. Hope this helps someone....

Forgot to ask my question...Can I be taxed or 1099 after my short sale? I have read about the Mortgage Debt Forgiveness Act of 2007 but have been told that only covers refi's NOT short sale forgiveness.  I live in Florida, if that effects anything. Just not sure what to expect.  For simple number sake, If I owed 100K and sold for $50k will I be taxed on the $50k forgiveness?

I'm confused.  I was also amazed to read above that I could have negotiated how my 1st and 2nd mortgage holders reported my short sale to the credit bureaus. I lucked out with the 1st mortgage, not so much with my 2nd.  Is this something my realtor should have done?  I am sort of irked now, but what's done is done.  I guess I should be happy with my 67 point hit and just feel relieved I am out from under all that debt.  Hind sight...I read SO much before I did this, not enough it seems now.

Sidney is still trying to sell the benefits of his bogus "Certified Distressed Property Expert" designation--a made up credential that is endorsed by no one except--guess who?--the company selling its course to anyone who has the money to pay for it.  Hey, Richard, how would you like it if someone set up an "institute" to designate all comers as attorneys?  Kinda like a diploma mill.  

http://www.distressedpropertyinstitute.com/about.htm

(I do note, since my last visit to the "Distressed Property Institute," that the FAQ page, wherein the site admitted their designation is endorsed by no one, has been deleted.)  

The practical reality is that because Amber had an unusually LOFTY credit score to begin with, her fall from grace (so to speak) from a short sale is exactly the same as from a foreclosure, except that she would've also borne a public record from the foreclosure, whereas she doesn't bear that stigma from a short sale.  Anyone can negotiate the result Amber got--indeed, isn't she proof of that?--and you don't need a "Certified Distressed Property Expert" to do it for you.

It has already been explained above that Fannie/Freddie shortened the seasoning requirement for short sale to two years vs. five years for foreclosure.

Just statin' the facts, Sidney.

Sorry, but there's nothing "opinion" about the fact that "Certified Distressed Property Expert" is not a bona fide designation endorsed by anyone.  Nor is my comment an "attack."  It's the truth, and nothing less.

Richard, you should be grateful that someone (me) has pointed this out instead of censoring me for stating the F-A-C-T-S.  You want your blog to maintain inherent credibility, do you not? 

Yes, Don, I imagine that quite a few dubious activities will face scrutiny as the real estate bubble continues to deflate.  That hissing sound is realtors seeking desperately to differentiate themselves by "self-certifying."  The various state compliance and licensing agencies should start, in my opinion, with Sidney's statement, "The Certified Distressed Property Expert is a designation recognized by the Florida and California Associations of Realtors. It is a program that is rapidly expanding throughout the country."  This statement is simply not true; the poor unsuspecting distressed homeowner is often taken in by it.*  Let's check, shall we, to see if the Florida and California Associations of Realtors recognize this "designation."

Nope for Florida => http://www.floridarealtors.org/Education/FocusonEducation/index.cfm

Nope for California = http://www.realtor.org/education/realtor_university/designation

Most certainly the CDPE designation is NOT "expanding throughout the country."  It's nowhere to be found at the link for National Association of Realtors endorsed designations.  In fact, November is NAR "Designation Awareness Month" so, by all means, let's all be aware of bogus designations lest we be taken in by "expertise" that doesn't exist--except, of course, in the mind of the self-certifying realtor.

http://www.realtor.org/education/realtor_university/designationawarenessmonth 

Insofar as which course of action nets the distressed homeseller the best outcome, let's take a look at the bottom line numbers for a typical short sale in California.

Current principal balance = 500000

Fair Market Value = 400000

Investor offers 78% of FMV = 312000 to lender (zero to homeowner / possible 1099 for phantom income of 188000)

Realtor secures new buyer at 82% of FMV = 328000 MINUS 6% commission = 308320 to lender (zero to homeowner / possible 1099 for phantom income of 191680)

Clearly, then, a distressed homeseller would be better off bypassing the realtor and selling straight to an investor.  (I won't discuss the implications if the investor is married to a realtor as that seemed to bother Richard Z. earlier and he deleted my post.)

Will the participation of an attorney create a better outcome?  I don't see how, since he, too, must locate an end buyer for the property and complete the transaction via the highest net to the shorting lender to ensure the deal gets done.

* I believe I'll write to the California Department of Real Estate and ask if they know about the advanced expertise that some realtors are claiming.  I'll mention that if they want to know anything about this new designation, they can call Sidney Jimenez.  

Janie, I'm sure about the terminology you're using but I will assume the "Foreclosure Judgment" is the document received by your clients where it states that they are in default of their mortgage and the lender will pursue the foreclosure of the home. That letter should state that they have 20 days to respond. If that is the case, then your clients have quite a way to go to sell the home before it is actually foreclosed. Send a letter to lawyer named on the documents they just recieved (send them certfied, return reciept) and request an extension of 90 to 120 days as you're trying to remedy the situation. At this point the only damage to the credit should just be done by the actual missed payments to the lender. In the mean time you can continue with the short sale process.

In the event it hasn't been sold during the extra time your client recieved by sending the letter then they will received another letter giving them a court date where the bank sale date is set. Your clients can go to that hearing and request another 90 to 120 days stating the same reasons as the letter. (I had a case where my client was able to get an extra 6 months at this hearing)

If you client get to sell the property in a short sale then the terminology used to explain the sale to the credit companies should also be negotiated. The best case scenario would be to have the lenders report the transaction as "paid as agreed" or "paid as negotiated" that will minimize the damage.

If this is you clients' homestead then the 1099 is not a factor, unless they have a home equity loan. The exception for the HELOC not to count against towards the 1099 would be if those funds were used for the original purchase of the home or used to make improvements to the home that added value.

Hello -I have enjoyed reading all of these posts and I am now seeking some advice on my situation. 

I bought through FHA my first home during the peak of the housing market ~2.5 years ago (100% LTV, single mortgage fixed 30 yr).  My house is worth about 50,000 less than what I currently owe.  I have a good job, and can make my payments easily, never been late on any of my bills including the mortage.  When I bought the home I was single, and this was "the next big place" to invest in real estate in my city.  My problem is that my neighborhood has gotten worse and worse, and since the housing market has declined, the rest of the new homes in my community aren't being built, some are being foreclosed, and the plan to revitalize this former "blighted urban neighborhood" seems to be evaporating.  A man was shot behind my house last month.  I'm getting married in 2 months and I don't like the idea of my wife being here with me with these kinds of activities becomming more common.  My HOA doesn't allow homeowners to rent their homes, and even if I could get an exception, I understand from my lender that I can't rent out the house without refinancing it, and of course no bank will loan me 130% LTV.

I could make no argument whatsoever that I am currently unable, or will in the future be unable, to pay back my obligation.  My problem is that if it comes down to a decision to be financially responsible, or look out for the safety of me and my future family, I don't see many options.

I called my lender and before asking any questions they immediately told me to put my home on the market, and after 90 days I could apply for a short sale.  This is the first time I heard of a short sale, which is how I found this informative blog. 

Can anyone else here offer some advice to me in my situation?

Choc, a Short Sale is when a lender agrees to let you sell your home for less than what is owed on the mortgage. For a primary home there is typically a minimal impact to you. However, in order to qualify for a Short Sale there needs to be some kind of Hardship that will show the lender that you either can't make your mortgage payments, will soon not be able to make your mortgage payments or some other circumstance that will affect your ownership of the property; such as a divorce or a relocation due to employment. Unless there is another factor for the sale of your home, I don't think a bad neighborhood in itself will qualify you for their consideration. Also, there are some lenders that require that you are behind on your mortgage payments.

I suspect that answer will bring out more questions.

Choh, please do not listen to Joe the Realtor who claims that a short sale will have "minimal impact to you."  He's right, however, that you must provide a hardship letter, along with paycheck stubs and bank statements, to indicate that you have a hardship.  Investing in an area that didn't quite pan out the way you thought doesn't constitute a hardship, in my experience.

If you now have sterling credit, your fall from grace will be not as devastating as if you had let everything go--which is the situation for most people in true hardship.  I agree with the lender's recommendation to immediately put your home on the market and then proceed to short sale.  But there WILL be an impact on your credit score and qualifying for a future mortgage.

Richard wrote:  As you can see, the answers are all over the place.  I am working a a definitive researched answer but I don't have it yet.

A thorough understanding of Score Factor Codes--particularly Score Factor Code #22--would be important for such a definitive answer.

I am in the same situation as choh(almost)

never been late, current on all bills...etc.

but I live in Poinciana(kissimmee ,fl) a huge nieghborhood 26,000+homes of which 40% or better are in some stage of forecloser...I bought back in 2005 (the front side of the bubble) @ $200.000. in 06 my home was bieng sold for 330.000 and many spec homes where built when the bubble popped the builders liquidated what they could and ran....the current situation is this...there are 90 4 bed 2.5 bath 2 story 3000 sq ft homes listed on mls for $99,000 in poinciana and many other's 3/2 in the 75,000 range...brand new never lived in!!! look up zip code 34759 to back it up!

I need to relocate to T.N. to keep my job with in the next year so I have no chioce but to short sell...my bank sent me a packet and I am in need of a realtor to help me through the process.

my question is on the credit side of the house...if I want to buy it seems 2 years is my waiting period...what about a construction loan if I choose to build v.s. buy? i do own land in T.N. 

Richard,

I am current on my mortgage.  Never missed a payment.  I need to move because being accepted into pharmacy school.  Can't afford to live here while in pharmacy school.  I owe more than its worth.  I just signed with a realtor to sell. Just got a call from him telling me that he can't list my house because the lender will not work with me because I am up to date.  Is this true?  Are they working with people who are up to date and not behind?

Thanks

Tim

Brandon, fl

I posed the following question to an underwriter at one of the ten largest national banks.

<!--StartFragment-->[quote] We are now experiencing consumers seeking loans when only a year or so ago they sold their homes through short sale.  As you know, Fannie Mae issued new guidelines in June 2008 regarding seasoning of preforeclosure sales.

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf

Pertinent portion:

Establishing a new policy for preforeclosure sales.  A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action.

However, Fannie Mae attempted to clarify the new guideline in Announcement 08-16 (FAQ) dated August 13, 2008.

Pertinent portion:

Q7: If a borrower has completed a short sale and was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?

A:  If the borrower is purchasing a new property and the previous mortgage history complies with our excessive prior mortgage delinquency policy and does not have one or more 60, 90, 120 or 150-day delinquencies reported within the 12 months prior to the credit report date, the loan is eligible for delivery to Fannie Mae, provided the lender or servicer [that] completed the short sale has not entered into any agreement that obligates the borrower to repay any amounts associated with the short sale, including a deficiency judgment.

In brief:

Short sale => never delinquent => no agreement to repay => no seasoning
Short sale => never delinquent => agreement to repay => two years seasoning

My questions are:

1. Does your bank interpret the above to mean that if the borrower was never delinquent on the mortgage of a short sale property, there is no seasoning requirement at all?
2. If, however, the borrower enters into a repayment agreement for any portion of the loan so shorted, they automatically are prevented from obtaining a new loan for two years?
   

Perhaps the quoted portion is simply a case of unclear writing; i.e., if you agree to repay the lender some portion of its loss, seasoning is two years.  However, if you agree to repay the lender no portion of its loss, you can get another loan immediately.  This makes no sense.  

Also, Fannie’s clarified policy of August 13, 2008 seems to fly in the face of its own policy against “buy-and-bail” schemes.  That is, a homeowner ought not to be able to get a short sale approved, only to then turn right around and buy another house—sometimes even a model match in the same neighborhood—for a lower price.

It seems we have a case of several policies overlapping and conflicting.  What do you think? [quote]

Here's the underwriter's response--again, diametrically opposed to Fannie's "clarified" guideline.

[quote] The policy we have been working with is if there are no delinquencies, monthly mortgage lates or deficiency, we can make the loan. It may all depend on how the previous shorted mortgage holder reports. If our borrower shorted their previous mortgage and arranged to repay the deficiency through an unsecured note, as long as their payment history is satisfactory and they qualify with the debt, and as long as the credit report does not indicate the deficiency as past due or a collection, we are O.K. [quote]

So to those in this situation, I would say you'll have to see how it plays out when you seek a new loan.  Obviously, the right hand doesn't know what the left hand is doing.  Write to me off-blog for the name of the national lender.