To Short Sale or Not...Just Let Go

By
Real Estate Agent with Keller Williams Realty

Looking at the current housing market and the plight of so many people everywhere, many people and institutions have serious, potentially life-altering decisions they either have to make, or could be faced with soon enough.  What I’m talking about is the possibility of people who have to sell and are upside down in their mortgages.  Do you continue to struggle to make payments on a mortgage that you can no longer afford?  Do you let the house simply go into foreclosure so that the house goes back to the bank?  How about a Short-Sale, where the home gets sold for less than what is owed on it and the bank (usually the 1st lien holder) writes off the difference and the second lien-holder gets minimal compensation (usually one or two thousand)?  This strategy is becoming more talked about, though it can take several months for a deal to close after the highest offer.  Many are realizing that unless you have skipped several payments, the banks won’t talk to you.  This can really affect your credit for years.  But like most of us, you don’t want to ruin your credit. 

Some states have seen many people simply walk away from their homes after living several months without paying, vacate and only to send the keys back to the bank later, which is and will be destructive to their credit.  But the owners feel they have no option.

Even the Wall Street Journal acknowledges the difficulty everyone involved in the short sale transaction must sometimes go through in these potentially time-consuming moves.

The banks aren’t in the business of holding real estate for many reasons.  Yet “they want to work with the homeowner.”  I am reminded of a lesson in “Letting Go” I learned many years ago:  In Africa, many tribes consider monkey a delicacy.  In order to catch them, the hunters will dig holes just big enough for a monkey to stick its hand into.  They will put bait into the bottom of it for them to entice the monkey to reach in and grab it.  What happens, is when they try to pull it out with their bunched up fist is that they get stuck and hence, caught.

I see this as the perfect metaphor for what banks are doing to many homeowners.  They say they want to work with those struggling to make payments, yet are reluctant to change the terms of loans because of the staggering losses (from thousands of loans) incurred by investors holding these notes.  Yet to go through the entire foreclosure process on average costs the lender (and local government) $40,000-$60,000 (legal fees, upkeep, taxes, repairs, etc).  Then when the home is finally sold in a “declining” market, the bank looses even more money.  Then, as values decline more homes and other banks’ loans go “upside down.”  So both sides essentially get caught.  And to top it off, according to much mainstream media, Bloomberg and even a recent article in the Washington Post (4-23-08) lenders are swamped with requests to modify loan terms.  And the cycle continues.  However, there is hope...awareness is half the battle, lenders and the government are attempting to connect the dots.

What is the next move?  If you think that your home loan is going to get out of control, by all means, call an attorney and then your lender and try to work something out.  Be persistent.  It is most assuredly in the best interest of all banks and communities nationwide to salvage a defaulting loan.  This too shall pass.
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Rainer
91,793
Patrick Lambert
ALLY Real Estate - Waikoloa, HI
Hawaii Real Estate Expert
The banks are silly not to work with the homeowner ... they can't sell the house for more should they foreclose. We are heading back to a time ten years ago when there were so many in this same predicament. The banks are just going back to the script on the wall and failing our economy further by doing so.
Apr 23, 2008 05:55 AM #1
Rainmaker
706,373
Brian Block
RE/MAX Allegiance, Managing Broker/Branch Vice President - McLean, VA
Northern Virginia & D.C. Real Estate
Stephen, very interesting analogy about the monkeys.  Banks should work with the homeowner as much as they can.  Short sales certainly are preferable to a foreclosure, though either situations is bad for the owner.  It's a lesser of two evils type thing.
Apr 23, 2008 08:51 AM #4
Ambassador
962,501
Mike Frazier
Carousel Realty of Dyer County - Dyersburg, TN
Northwest Tennessee Realtor

Stephen,

Excellent post and timely for our environment!

Apr 23, 2008 08:56 AM #5
Rainer
8,325
Stephen Adams
Keller Williams Realty - Leesburg, VA

Patrick,

You are right as well, the banks are "silly" not to work with the homeowner because it's still "business as usual" to them.  After the hardship letters and all of the other methods of proof, the heart of a bank can even display itself...sometimes in time, sometimes not.  And the other observation about repeating themselves...Funny thing about History...Do you suppose we will ever learn?

Apr 23, 2008 12:37 PM #6
Rainer
8,325
Stephen Adams
Keller Williams Realty - Leesburg, VA

Brian,

It kind of makes sense when you think about the monkeys, eh?  Yes, one choice is better than another, however, perhaps the answer will be to streamline the modification process en masse.  Not a "bailout", but rather a sweeping lender oversight arm of the government...since "they already know everything about us, how much or how little households have coming in, etc".  A few simple calculations of the reset rates, how much is owed and what future interest rates (anybody's guess) do should do the trick.  

There are 100's of thousands of good and intelligent people that stand to lose their homes because they didn't "read the fine print" of their loan packages.  It was a culture of greed (and if not, envy) by many homeowners throughout the country that double-digit appreciation, profit and "no-brainer" promises from many (not all) in the lending industry.  We all saw it.

However, pointing fingers will not solve anything.  Wanted....a simple solution :)

Apr 23, 2008 12:53 PM #7
Rainer
8,325
Stephen Adams
Keller Williams Realty - Leesburg, VA

Mike,

Thank you for your compliment.  This is a rather precarious time in History, isn't it?

Apr 23, 2008 12:54 PM #8
Rainer
6,814
Billie Dalessio
Home Run Realty, LLC - North Haven, CT

Stephen, great post. It makes sense for the lenders to work with people to keep them in their homes, but in my recent experience they make it so frustrating for the delinquent borrower that they don't trust the lender anymore. One of my clients tried to do a loan modification starting in Sept 07, she was dilligent, calling the bank every few days- and never getting a straight answer. On Dec 24th she received a call stating "it doesn't look good"-so on Jan 1, 2008 she puts her home on the market hoping to net enough to cover the mortgage. A sheriff's sale is scheduled for Feb 2,2008. On 1/31/08 she gets an offer that is close to what she owes, and her Attorney advises her to file BK to stall the foreclosure. On Feb 1, 2008 I call the lender to notify them of an offer and they tell me "Her loan modification is approved" WHAT??? When were they planning on telling her? Sorry for the rant- but if they truly want to help people- they need to ramp up their staff and provide better communication with the public.

 

Apr 23, 2008 03:20 PM #9
Rainer
8,325
Stephen Adams
Keller Williams Realty - Leesburg, VA

Hi Billie,

Thanks for the compliment, and no worries on the rant.  I'm just sorry that your client went through all of the trouble before resolution in the end.  So many Agents are going through this because of the banks being overwhelmed with the vast numbers of delinquencies.  Communication from their end is definitely the problem.  Could it also be denial?  Or what about hope that "it's just going to go away"?

Apr 23, 2008 04:04 PM #10
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