Lisa Cartolano

New Guidelines for Short Sales-Will Reality and the Ideal Meet?

There is a concerted push to make the short sale process more streamlined. If you don’t knon what a short sale is, it when you sell your property for less than the mortgage owed. For example if you owe $650,000 and sell the property for $550,000, then this is a short sale.

The problem with short sales is there is not a streamlined  process. For a short sale the bank holding the mortgage needs to be notified and they are involved in either accepting or not accepting the terms of a short sale.

The frustrating part? Every bank does it differently. And it can be a LONG process. Some banks are better  (Wachovia) and some are notoriously difficult (BofA, Chase). 

Why are short sales a good idea? Well they help to stop the hemorrhaging when it comes to declining prices. Think about it, if you’re a homeowner and the property is going to foreclosure, you may considering the selling the new kitchen cabinets and granite countertops and hell why not sell the appliances as well? In addition if there is small leak in the roof, why fix it? Once this property goes to foreclosure, it is a distressed property because there deferred maintenance on top of a missing kitchen. Of course because of the condition the property, despite the location, will not be able to sell for the same price of a home in good condition. This property sells for less money and helps to bring down the prices in the neighborhood.

What else is good about short sales? The homeowners credit could probably recover and when your credit score is not completely trashed things like qualifying for a car loan, or a credit card becomes much easier. This is not only good for the homeowners who needed to sell but is good for the economic recovery. If you can get credit and make purchases, this will help the broader economic engine and move us more toward recovery.

The third and what seems like the most obvious to me, is the banks will more than likely recoup more of their money. Think about it. If you are selling a home with cooperative homeowners who are going to help out in the sale of the property (the kitchen will remain for example), then the final sale of the property will more than likely be more than if the property has been stripped via the typical foreclosure route. What else does this do? It helps to stabilize prices in the neighborhood. With less highly distressed home sales, the prices do not plummet. This in turn will probably keep more homeowners in their home, because if prices stabilize and homeowners are able to refinance and stay, then there are less short sales and less foreclosures.  Seems so completely obvious, you have to wonder what the banking community is thinking.

There are some changes coming down the pike. Short sales are becoming more common and in some instances easier than in times past.  Click here to read more regarding HAFA (Home Affordable Foreclosure Alternatives Program), which is the program that is to set the guidelines to assist with short sales.

Will these laws make real inroads? I am cautiously optimistic. I don’t think these laws really go far enough in fact. What the banks should really look at is principal reductions for those who want to stay in their home but find home values much less than when they bought the property. The one challenge I see these new laws is there is not a lot of teeth to it. Only those banks who utilized TARP funding are required to comply. The reality is for this to be effective is staving off foreclosures and helping the communities in which homeowners are underwater, there will be some success with the changes, but some significant challenges ahead for homeowners who find themselves underwater.