Are Short Sales Like Snake Oil? You Decide!

Eric:  I can see that I've hit a raw nerve in this writing and I sincerely thank you for your input; however, my research has proved the results to be different than your assessment.  We will never again see the looseness in the lending industry that has been present for the past five years, just as we will never see the day trading in dot com stocks that the late 90's was filled with.  It will be more difficult in the future to get a mortgage.  I am sure you will not argue that point.  That said, I believe strongly that not informing a seller of the potential financial plight on all sides of foreclosure AND short sale is a dereliction of my fiduciary duty to my client.  I will not direct them towards a course of action as an end-all, fix-all when there are more severe ramifications than many agents understand.  Further, when I stand to make a profit in a short sale, and NOT in a foreclosure, that could seriously call my ethical position into question.  I have done a few short sales, but my sellers have been well informed by myself, credit advisors and legal counsel before they made the choice to move forward on the short sale.  I am afraid that is not the case in many situations today however and that is the reason why I stand by this post.

Josh:  Not many because when I explain all the ins and outs to seller clients, they often choose not to sell short.  And many that do I refer to other agents in my office that specialize in short sales.  As I mentioned in this post, I am afraid that many agents sell this choice of action as something more than it really is because they have not really done their homework as to the financial impact that a short sale will make on their sellers.  

My purpose in this post was to enlighten some of those agents so that they can be empowered to advise their clients better...  and to hopefully avoid some of the inevitable legal actions that I see coming against agents who don't.  Please do not take this as a threatening post or position against anyone...  Just an ounce of prevention.  I work with foreclosures every day and know contacts in loss mitigation all over the country.  I could easily choose to get into the short sale business but I have just chosen not to be involved because I do not see this as an easy way out - It isn't! 

The truth of the matter is that many people nowdays do not see a promise as a promise.  When they sign a Deed of Trust - it is a no pay, no stay agreement with the lien holder.  There are no easy ways out if you break that agreement.  There will be pain and it is bad from the Short Sale side AND the Foreclosure side.  I just want to make sure that the people in this position are getting that message clearly from their agents.  It takes character to do the right thing!  Let's show that we have good character to the public at large and also allow this to reflect well on our industry.monstera

Good response Josh and we can agree to disagree.  And I will continue to refer out short sales to those who choose to do them.  I certainly respect your right to do so and I suspect that since we both have sources that are saying different things the answers will pan out somewhere in the middle.  I am glad that your clients have received the "get out of debt free" cards that you mention and I think that this is a valid thing for others to know as well that why should request something similar for their sellers as protection.  In the few that I have done, there have been no such statements given to the sellers and I checked with a short sale specialist in my office.  She told me that only about 50% of the deals she has done have come with similar paperwork from the lender.  We should all be pushing for this for our sellers in short sales.

The last item which you do not address is the credit score issue.  This is also in question and you can hear various answers from MANY sources as to the true impact on credit score.  The banks are motivated to give a short sale option over the foreclosure route due to sheer cost; however, we all know that underwriting requirements have tightened DRASTICALLY in the past 2-4 months.  That trend WILL continue, I can almost guarantee it.  I just read a fascinating post on AR from Steve Harless on the fallout from the foreclosure crisis.  It is being forecast that the ARM's that will adjust later this year will cause a snowball of additional foreclosures this year.  Credit score minimums will continue to increase on active lending programs and I suspect we should be VERY careful about spreading the two year numbers around for re-qual for a mortgage.  I believe this is process is going to be much more difficult than we think.  We will probably never get back to the free-wheeling lender days of two years ago.  Government regulations will start kicking in as well soon and the requirements to qualify will only get tougher from here on out.

So in retrospect, my point has been that short sales and foreclosures are a sticky wicket.  There is no easy out and agents should be careful about positioning these as a quick and easy release from obligations - they aren't.  Most of us who have beenknow this and the intent of this post was to get us talking about the bigger issues.  The post has done that for sure and I appreciate all your input.

Another issue to keep in mind is bank motivation.  At the current time they are going to say to ANYONE that will listen that they would rather do a short sale and they will try to paint a somewhat more rosy picture, but let's think about their motivations.  Short sales cost them MUCH less than a foreclosure.  Sure they want the seller to do the short sale - it is better for them.  Are they motivated to tell the seller that things will be good for the seller to buy again in two years.

Let's think about that for a minute though.  Lenders sell their paper in the secondary markets to replenish their cash.  The secondary market has become VERY restrictive due to all the foreclosure activity and more to come.  Do we really think that sub-prime lending is coming back anytime soon, if ever.  If the top 25% of borrowers have no short sales, foreclosures, bankruptcies, etc. on their records they will get front of line privleges in the next few years for mortgage dollars.  Again I make the point that we should not be painting a rosy picture of ability to qualify in the future for anyone, particularly those that have credit blemishes of any type!