Deal of the Week – 02/03/2011 – Rancho Bernardo Homes For Sale

1/21/2010 – Pomerado Road Turns Into a River!

Will New Government Short Sale Intervention Help?

The US Treasury announced some new/clarified guidelines for short sale lenders last week. This announcement was made with the intention of stepping up pressure on lenders to execute short sales more quickly and give them incentives to do so. I’m not sure the US Government really understands what is happening on the ground as it relates to short sales. I’m sure these incentives will not hurt, but I really doubt they are going to help streamline the process that much. I’ve blogged a ton about short sales over the past few months and I’ve been working with short sales since this all started in 2005/2006.

I’ve been in the real estate business through all of the ups and downs and turmoil of the last three years and I’ve got the battle scars to prove it. I remember when we made fun of the agent in our office that took a short sale listing. I remember thinking “I’ll never do that”. Boy was I wrong! Turns out, that agent (who is no longer in the business) was on the cutting edge of a wave that has yet still to break completely.  I say this just to give some context to my comments and demonstrate that I do speak from experience.

It doesn’t take a genius to figure out the main issue with short sales is the amount of time they take to get approved. When a buyer has to wait 3-4 months for a response to an offer, they get tired and move on. When the answer does come and the buyer is gone, you have to start all over again or at least go backward a few steps. I don’t think the government is going to be able to do anything about that issue.

I was talking with a short sale negotiator at a major lender the other day who told me she was handling 400 files at a time. How can one human deal with 400 files and do it quickly and effectively? They can’t. So, unless the gov’t is going to help lenders hire more people and provide the support systems to handle more employees, I don’t see how this is going to get solved.

The other piece of the puzzle is, in order for the lender to receive the gov’t incentive they have to agree to forgo/forgive the deficient amounts on both 1st and 2nd trust deeds. I think the forgiveness part is going to be tough for investors to swallow. At this point there is a ‘one-action’ rule in California. In other words lenders have one chance to collect a mortgage debt. Of course it is more complicated than that, but for the sake of this post, I’m not going to get into it.

So, if a lender grants a short sale they basically agree they are going to accept the short sale proceeds and not try to collect any more from the borrower. The way lenders get around the one-action rule is by making the borrower sign a short sale approval letter that basically says ‘we reserve the right to try and collect money from you in the future. Unless the seller/borrower signs that letter the short sale will not be granted, the property proceeds to foreclosure and that is that. In the foreclosure the 1st lender gets what they can, the 2nd lender gets nothing, but since the 2nd lender has not exercised their one-action, they will then try to collect. When the 2nd lender tries to collect the borrow declares bankruptcy and the 2nd lender gets nothing.

So, it would seem to make sense that lenders would agree to not try to collect and take the gov’t money to go away, but I’m not sure I see that happening in many cases. I think the loan amounts and the deficiencies are just too high and banks are just to big and bloated to really make this work. There are also other complicating factors. If the loan in question has private mortgage insurance attached to it, there is another layer of approval the short sale has to go through. If the 1st and 2nd loans are with different banks (as they often are) the lien holders may not cooperate with each other. Even when the loans are with the same bank, the underlying investors are different, so the 1st and 2nd may not cooperate on those either.

I hope I’m wrong. I hope this latest effort gets things moving more quickly and easily on short sales. However, I think we’re just going to have to continue to wade through this mess together. There is going to be ongoing cleanup efforts by government and the banking industry for years to come. In the mean time, if you need short sale help or advice, I’m here to help!

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