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Real Estate: Foreclosure

posted on 29 June 2008

‘Short Sale’ of Real Estate Can Help Homeowners Lenders, Avoid Costly Foreclosure Proceedings

By Charles J. Kovaleski

Loan delinquencies are increasing. Foreclosures are surging. And as home prices sink – back to 2003 levels in some cases – owners find that they owe more than their property is worth.

One of the options owners in default can use to help them with the long view financially is a so-called “short sale” – an agreement by a lender to accept less than it is owed.

Scores of homeowners in Florida and across the country may be faced with a scenario like this: A couple bought a dream home for $450,000 two years ago. They put 10 percent down, paid for their closing and all other purchase expenses out of pocket and took out a mortgage for $405,000.

Now ready to sell – say, because of a layoff that makes them unable to keep up with mortgage payments – they put the house on the market. But with the housing market now retreating from its most recent price boom, none of the offers exceeds $360,000, much less than the couple owes the bank.

But rather than suffering through a foreclosure, the owners could approach the lender about a short sale. The lender’s motivation to accept is driven by the desire to cut its losses, which escalate if it needs to take back the house and resell it at auction. The lender then can write off the difference.

The tactic also can be less expensive for homeowners. While they likely won’t get to keep the house, a short sale does prevent a foreclosure from appearing on their credit reports. A foreclosure could cause a consumer to lose 250 to 280 points from a credit score. In comparison, and depending on how it’s reported, a short sale could cost consumers just 80 to 100 points off their credit score – far better than a foreclosure.

In December, President Bush also created a tax incentive for consumers who could benefit from short sales when he signed the Mortgage Forgiveness Debt Relief Act. Before the legislation, housing debt that had been forgiven constituted income on a borrower’s tax return. Now the loan reduction can be achieved without that consequence.

Florida is among the states with greatest number of estimated foreclosures, including California, Ohio, New York, Michigan, Texas, Illinois, Arizona and Pennsylvania, according to the federal Joint Economic Committee (JEC), chaired by U.S. Sen. Charles E. Schumer. The report found that:

· 2 million foreclosures will occur by the time the riskiest subprime adjustable rate mortgages (ARMs) reset over the course of 2007 and 2008;

· Approximately $71 billion in housing wealth will be directly destroyed because each foreclosure reduces the value of a home;

· More than $32 billion dollars in housing wealth will be indirectly destroyed by the spillover effect of foreclosures, which reduce the value of neighboring properties.

“Non-profits that specialize in foreclosure prevention have been highly effective in acting on behalf of borrowers to explore their options with their lenders,” said a release by the JEC, “but they’re inundated and more resources are needed.”

· One tool to prevent foreclosure, the short sale has many steps, and the process demands scrutiny from your real estate attorney, real estate agent and accountant. Consumers should know that the maneuver can be more time-consuming and complicated than a typical real estate transaction. Among the things potential short seller should consider:

· Market value and transaction costs: Determine the value of your property. Your real estate broker can assist by compiling a comparative market analysis, which indicates the prices of similar property in your area. At the same time, you should get an estimated closings statement for the short sale – including expected sales price, unpaid loan balances, real estate commissions, outstanding payments and late fees – which your real estate attorney can compile for you.

· Contacting a real estate broker: These professionals can help you find a buyer for your short sale. Some have made this service a specialty, especially in recent months. Among other things, lenders will want to know the potential sales price and that your prospective buyer is qualified to purchase the property. The broker commission is negotiable. Sellers should realize, thought, that it’s the lender who will pay this cost, since the seller is not receiving the proceeds of the sale.

· Contacting the lender: Lenders will need to be convinced of an owner’s hardship. A letter detailing the circumstances should describe the situation, including the fact that the seller has no equity in the property and cannot repay the difference between the existing loan the proposed sales price. Be sure to get in writing that the short sale will satisfy all debts owed the lender, and that the institution will not pursue you for the difference between the remaining balance and the short-sale price. The process varies by lender but can take a considerable amount of time. During negotiations, short sellers need to ask how there lenders will report the sale to credit bureaus. Often, the sales show up as nothing more than a satisfied loan. But they could be reported as debts satisfied for less than the full balance.

Consumers should proceed carefully when considering strategies to avoid foreclosure. While a short sale is a viable option – real estate professionals more frequently are giving seminars on the topic – there are unscrupulous elements in the community who prey on the financially vulnerable.

Some illegitimate companies bill themselves as “loss-mitigation services,” playing on the name that some lenders give the departments that administer their short sales. Others claim to work for banks and ask already distressed consumers for fees with no intention of providing help.

A short sale can help a homeowner cut losses. To be sure you’re headed in the right direction, do your research and consult with professionals so that a bad situation isn’t made worse.

CHARLES KOVALESKI

is president of Attorneys’ Title Insurance Fund, Inc. (The Fund), the leading title insurer in Florida and the sixth largest title insurance company in the country. Acknowledged as the Florida residential real estate expert, The Fund has been in business for more than 50 years and supports a network of more than 6,000 attorney agents statewide who practice real estate law. The Fund, based in Orlando, underwrites more than 300,000 title insurance policies for owners and lenders in Florida every year. For more information, visit www.fundhomeinfo.com.