In 2009, lenders finally came to the realization that short sales save them a tremendous amount of money versus foreclosing. 2010 will likely be a repeat of 2009, but with an even higher ratio of short sales to foreclosures. It will again be the “Year of the Short Sale.”
The new Obama HAFA Short Sale program, which went into effect April 5, is already making a significant impact on the San Diego real estate market.
Short sales, which currently represent roughly 30 percent of the inventory and sales in San Diego County, can be a notoriously difficult and lengthy process. They take place when a homeowner needs to sell a property that they are upside down on -- in other words, a property on which they owe more than it is currently worth. In a short sale, the lender agrees to take a loss on the property and accept the proceeds from the sale at current market value instead of foreclosing.
The problem with short sales has been that banks are not real estate companies. They specialize in lending money and collecting interest. They are not good, it turns out, at doing real estate and processing and negotiating short sales. In fact they are really, really bad at it, and don’t have the necessary staff to handle the volume of short sales they are faced with.
The result is that banks can often take anywhere from 30 days to six months, and sometimes longer, to approve offers on short sales so the sale can close escrow. Buyers often drop off in frustration.
The process is also an expensive one for banks because it causes many properties to needlessly go to foreclosure.
The reason for this is that a short sale is a race against time -- specifically the foreclosure timeline -- because the foreclosure process goes on in tandem with the short sale process.
One arm of the bank -- the loss mitigation department -- is working toward a short sale while the other is moving toward foreclosure. At most lending institutions, these departments have no communication whatsoever. When the short sale process drags on, sometimes time expires and the bank forecloses despite the fact that a ready and willing buyer is waiting to purchase the property.
The HAFA program addresses these problems by requiring banks to streamline their short sale approval process.
Once an offer is submitted, the bank must evaluate and respond to the offer within 10 business days. The bank may not foreclose on the property during the short sale process and must agree to waive any rights to pursue a deficiency against the seller after the short sale. Finally, the HAFA program requires lenders to credit sellers $3,000 at closing for moving expenses.
This is good news because short sales are a win-win for lenders, homeowners and the real estate market in general. Banks net significantly more out of a short sale than they do out of a foreclosure. They learn this in every real estate downturn, but for some reason forget it in every real estate recovery and then have to learn it all over again.
Homeowners benefit from a short sale versus a foreclosure as well: they preserve their credit, avoid having a foreclosure on their record, get out from under the debt owed on the property (it becomes a settled debt), avoid federal and state taxes on the debt forgiveness and can buy again in 24 months or less.
For many San Diego homeowners who are hopelessly underwater on their homes and are saddled with huge payments, a short sale simply represents a wise business decision -- getting out from under a property that may take years to ever appreciate back to what they owe on it, and buying again in a year or two at current market value.
Wall Street giant Morgan Stanley (NYSE: MS) did exactly this on more than $2 billion dollars of commercial real estate in the financial district of downtown San Francisco, though the firm was careful to refer to it as an “orderly transfer of assets back to the lender.” Fannie Mae & Freddie Mac stipulate a 24-month seasoning period after a short sale before a borrower can be approved for a home purchase with a government-insured loan. However, many lenders and credit unions will approve buyers for home loans within less than 24 months of a short sale, and in some cases in a year or less on non-government insured loan programs.
Finally, the market benefits because banks typically dramatically under-price foreclosures, causing values to plummet in the areas around a bank-owned sale. Less foreclosures means higher comparable sales and a faster recovery for the San Diego market.
The HAFA program, combined with the banks refining their approval process and getting better and faster at processing short sales after four years of practice, means that short sales are actually starting to live up to their name.
Battiata is broker and CEO of the Battiata Real Estate Group.