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What Are Pros And Cons Of A Short Sale?

Audio

Aired 4/1/10

One in three San Diego County homeowners owe more on their mortgages than their homes are currently worth. That situation has homeowners searching for options to get out of their underwater mortgages. We discuss the pros and cons of doing a short sale, and the difficulties many are dealing with as they go through the process.

TOM FUDGE (Host): I’m Tom Fudge, and you’re listening to These Days in San Diego. Nobody wants to be sold short. But if you own a house, selling it short may be the best option you have. The boom and bust of the San Diego housing market has put thousands of people in the predicament of owing more on their homes than they're – than they actually paid for them. In fact, about one-third of local homeowners are, so to speak, underwater. This has made short sales very common. Homeowners who are financially suffering under the weight of their mortgages are trying to sell their homes for less than what they actually owe. There are some upsides to short sales, but they are not easy to do. That's understandable since short sales mean that lenders must agree to take a loss. We’re going to spend the rest of this hour talking about short sales, and if you have an experience with short sales, if you’ve tried to sell one or buy one and you have something to say, give us a call at 1-888-895-5727. Let me first introduce Kelly Bennett.

Kelly Bennett is a staff writer for voiceofsandiego.org, and she’s the author of Survival in San Diego, a blog on Voice of San Diego. And, Kelly, thanks very much for coming in.

KELLY BENNETT (Staff Writer, voiceofsandiego.org): Thanks for having me.

FUDGE: Well, Kelly, let’s speak generally about what options are actually available to people who owe more than their homes are worth.

BENNETT: Right, well, there’s several options. They could just keep paying. If nothing has changed in their employment or in their income, a lot of people are just sticking it out even if, like you said, they’re underwater, they owe more than they could sell for if they had to put their house on the market in this, you know, in these conditions.

FUDGE: So they’re just trying to be patient. Wait for the market to come back.

BENNETT: Right, just kind of stick it out, exactly. Another option is to just walk away from the house and foreclose. That’s often referred to as a strategic default, saying I can’t afford this or I don’t want to afford this for, you know, the next 15 years it might take for my house to get back to the price that I paid for it. I’m walking away. But there’s also an option, and that’s what we’re talking about here, the popular option, which is the short sale. That’s where you go to the bank or banks that you’ve borrowed mortgages from and say, I’d like to sell this home for less than I owe you, will you agree to that? And in some cases, the banks are saying yes.

FUDGE: And are the homeowners involved in short sales still paying their mortgage?

BENNETT: Some…

FUDGE: Or have they gotten to a point where they just can’t do it anymore?

BENNETT: Right, some do continue to pay their mortgage even while they’re processing through the short sale and negotiating with the banks and other lenders. A lot of people, though, since they’re going to sell short anyway and since they’re going to have debt forgiven anyway, don’t see the value, I guess, in paying – continuing to pay their, you know, $1800, $2400 mortgage payment every month and instead they, you know, they keep that money or they save that money and put that toward a down payment or a renter’s deposit or whatever in the transition as they move on.

FUDGE: In thinking about this, if a person continues to pay their mortgage, if I’m a bank, if they’re still paying their mortgage, why would I agree to a short sale?

BENNETT: Right, exactly. So that’s why that situation is pretty rare. Typically, when you’re a homeowner who’s trying to sell short, you send your bank a letter of hardship, saying, you know, I lost my job or I took a 10% pay cut or I started furlough days or whatever changed in your ability to then pay your mortgage. My mortgage payments went up because I had one of those interest only mortgages or something that hit a phase and my payments actually started going up every month, so something changed in your ability to weather that and pay that mortgage payment, and that’s what you have to demonstrate to the bank.

FUDGE: Why is this a good option for homeowners? A homeowner who’s upside down?

BENNETT: Well, it’s a lesser credit stain, typically, than a full foreclosure. And the rules for what you can do afterward in terms of buying another house is you’ve got fewer years to wait before you can actually get back out there and buy another house. So a lot of people are seeing it as a preferable alternative to foreclosure. There’s also something that I’m hearing a little bit about, sort of the social stigma is less on a short sale. Everybody can kind of understand that, you know, well, my home’s underwater, too, so you sold short and that’s fine versus just the sending the keys back to the bank or just leaving the house and walking away. There’s kind of a – some sort of intangible social difference there.

FUDGE: And, once again, if you have a story about a short sale, give us a call at 1-888-895-KPBS. Kelly Bennett is a staff writer with voiceofsandiego.org. Now I’m going to introduce, also, Mark Goldman. And Mark is a mortgage broker for Cobalt Financial Corporation, and he’s a lecturer in the College of Business Administration at San Diego State. And, Mark, thanks very much for coming in.

MARK GOLDMAN (Mortgage Broker, Cobalt Financial Corporation): A pleasure to be here.

FUDGE: Well, let me get you to pick up on something that Kelly was talking about. What are the advantages of a short sale for both the owner and the lender?

GOLDMAN: Well, for the owner, it’s a demonstration of a willingness to try to fulfill an obligation as best they can. Kelly just mentioned the stigma associated with that. In the credit analysis, it comes down to willingness and ability. The hardship that Kelly mentioned is an interference with somebody’s ability to pay on time but what really counts in an explanation of credit when a borrower tries to get another loan in the future is was there something – how was there willingness? Did they demonstrate that they tried really hard to meet the obligation? So the short sale is part of that. On the lender’s side of the coin, it’s an opportunity for the lender to work with the buyer and recover the greatest amount of money that they’re going to get. If – the lender’s options, if a borrower cannot afford to pay the loan back, from the lender’s side of the coin, the borrow – the options include, among other things, a foreclosure, which is quite expensive and time consuming, and it also drags down the value of the neighboring properties.

FUDGE: And why is a foreclosure more expensive and more difficult than a short sale? What’s the advantage of going to a short sale as opposed to…

GOLDMAN: To the bank?

FUDGE: To the bank, as opposed to a foreclosure.

GOLDMAN: Well, for one thing, you have cooperation of the seller. You don’t have an atagonistic owner who might take the inside of the house out with them. The property’s exposed to the market for a reasonable time to buyers who can get ordinary market financing and as a re – and they can make inspections, the buyers can. So there’s a lot of factors associated with ordinary market value of the property that will benefit the lender because they can fetch a higher price. If they go to foreclosure, the people who have to pay cash on the courthouse steps buy those properties without inspection, there’s no warranties, so there’s a great deal of risk associated with that and, as a result, the sale prices are reduced.

BENNETT: Plus, as the bank goes all the way through that foreclosure, say somebody doesn’t pay cash for it at the courthouse steps and the bank actually repossesses it and sells it as a bank-owned foreclosure, all of a sudden the bank has to spend all of the money that it takes to own the property, you know, transfer all of the title, hire a real estate agent, put up the sign, clean it out.

FUDGE: They’ve got to cut the grass.

BENNETT: Right, exactly. They’re now the ones responsible. They’re the one that if the city has some sort of code enforcement that is associated with foreclosed properties, they’re going to the bank to say, hey, this fence fell down and there some – there’s graffiti on it and you have to clean it up. The banks clearly are having some trouble with their portfolios of owned real estate so they don’t – in many cases, they’re preferring the short sale option, too.

FUDGE: And let’s get some of our listeners involved in the conversation. Let’s go to Graham in Carlsbad. Graham, go ahead.

GRAHAM (Caller, Carlsbad): Yes, thank you. I’ve been going through a short sale in the Bay Area for about nine months now. It’s finally coming to a close but one of the best decisions I made in this process was to actually hire a lawyer who’s versed in short sales. You know, it really wasn’t until I got a lawyer involved that the banks were cooperating. I’m hearing everything on the radio, oh yes, it’s in the best interest of the banks to go through a short sale and that may be true but they do not make it easy on you. They didn’t want to release me from my deficiency judgments, they – you know, there was all sorts of complications in there and it wasn’t until I brought a lawyer in and had them actually do the negotiating on my behalf that I got my first and second lender to release me from the deficiencies and actually move this forward. It’s, you know, I think everything I’m hearing is saying that the banks – it’s good for the banks but, boy, it’s really, really hard and I would strongly suggest that anyone going through this hire somebody who is highly versed in this process because it wasn’t until I got those people involved that things really started to move.

FUDGE: Well, we were going to get to that, the tough part, Graham. We’re going to get to that. And you said that you had two lenders that you were dealing with?

GRAHAM: Yeah, it was actually very complicated. I had a first and a second and there was a refinance involved as well, so not only did the banks not want to release me from my deficiency judgment but it turns out that the money that they are going to forgive me I owe taxes on now, so, you know, it’s one of these processes that it may be the best option for everyone involved but, boy, it’s not like you’re just going to walk away scot-free. There’s no doubt about that.

FUDGE: Thanks very much, Graham. Let’s get another comment from a listener before we get responses from our guests. Jeff is in La Mesa. Jeff, you’re on These Days.

JEFF (Caller, La Mesa): Hi, how you doing?

FUDGE: All right.

JEFF: You know, I was – I’m in the mortgage and real estate industry and I was watching a video blog and they were talking about how banks are benefiting even more so than what is just on the surface because a lot of the banks that went under sold their portfolio at about 50, 60 cents on the dollar but are able to recoup 85 cents on the dollar when they go to short sale. And it’s on the original loan amount that they’re recouping the 85 cents on the dollar. So the benefit to the bank is even greater when they do a short sale versus, say, modifying or letting it go to foreclosure. So in my experience, I’m seeing the banks are moving a lot faster now because it’s to their benefit to make the money as quick as possible by getting these short sales done.

FUDGE: Thanks very much, Jeff. Well, Mark Goldman, Jeff is suggesting that the banks are starting to get it but our previous caller was talking, telling a story that we hear all the time…

GOLDMAN: Yeah.

FUDGE: …about the incredible difficulty of getting banks to agree to short sales.

GOLDMAN: Well, Jeff makes some great points but I would like to go back to, was it Graham?

FUDGE: I think it was Graham, yeah.

GOLDMAN: Yeah. He brought up a lot of great points. Number one, get competent help. Be very careful of people who charge fees in advance for assisting in short sales. In fact, the Department of Real Estate in California forbids that. But having competent legal advice is important. He also mentioned release of obligation and that’s a necessary issue if somebody is involved with a short sale, to be very aware of the opportunity for the bank to come back within the next three years and sue them on a deficiency for any shortfall that they may have. The other issues that he brought up, he was a perfect call-in person because he brought up so many important issues. The second mortgages, there’s a lot of difficulty when the first lender agrees to a short sale. Their goal is to get as much money off of the closing table as possible but they realize in order to deliver the property free and clear to the new buyer, they would need to get a release of any second mortgage, and the second mortgage lenders are sometimes quite difficult in agreeing to a short payoff. Now, in a foreclosure, they lose everything.

FUDGE: They get nothing.

GOLDMAN: Yeah, and…

FUDGE: So you would think it would be in their interest to do a short sale.

GOLDMAN: Well, they’re going to only – some of them are getting between five and maybe ten percent of the face value of their note. And another thing that I’m seeing for our people who are buying properties, some of these second mortgage lenders are requiring cash payments outside of escrow, which is fraud because they’re not disclosing to the first lender all of the money that’s on the closing table.

FUDGE: Oh, okay.

GOLDMAN: So there’s a lot of stuff going on out there, and these are institutions that are doing this.

FUDGE: Kelly.

BENNETT: Yeah.

FUDGE: Kelly Bennett, what would you like to say?

BENNETT: Well…

FUDGE: What would you like to add?

BENNETT: Well, I think I would just add to the statement about the deficiency judgment. That just very basically means the amount that the bank forgave to somebody who was doing a short sale. You know, say it’s $50,000, what Mark’s talking about is within a few years, the bank can come back to you and depending on what the initial agreement in your loan was, the bank can come after that amount. And we haven’t been seeing that happening very much but it’s still sort of in the contract language. Just because something isn’t happening very much doesn’t mean that it can’t happen or it won’t start happening more. And so that’s why it’s really important to find – to make sure that you’re reading all of the documents that you’re signing with the banks. It can be really tempting, I think, to just see this as some sort of relief. You know, I’m finally getting out of this house that I’m $150,000 underwater in, and I can move on and I can rent for awhile and I can kind of get my bearings again. But you’re signing a bunch of documentation and we know from the boom that it was really dangerous when people were signing a bunch of documentation that they didn’t understand or didn’t read through. So finding somebody who can help you understand those bids and especially negotiating some sort of agreement about the deficiency, whether it’s signing a note that says, you know, with a very low interest rate over the next 20 years, I will pay off this $50,000 that you’ve forgiven or something like that. That is happening sometimes but it’s better to do that than to be wondering if in the next three years the bank’s going to come after you and sue you.

FUDGE: And, Kelly Bennett is a staff writer with voiceofsandiego.org, and Mark Goldman is a mortgage broker for Cobalt Financial Corporation. He’s a lecturer at the College of Business Administration at San Diego State. Let’s take another call. Robert is in San Diego. Go ahead.

ROBERT (Caller, San Diego): Yes, hello. I just wanted to share a story with you guys. I went through a legal separation. My wife and I owned a home. And I was trying to keep the home. You know, we were going to – Obviously, when we split our incomes and we went our separate ways, I wanted to stay with the property even if it was offered at a lower price. After doing some research, you know, the banks were not willing, whether you get a legal separation or a divorce, they’d rather sell it to somebody else than to make a deal with me, which didn’t make any sense to me. I was willing to pay something, you know, even if it is a little bit – a little savings, that would’ve definitely been – saved us a lot of headaches. I don’t understand why that happened. Maybe you have some insight on that.

FUDGE: Anybody? Want to jump in?

BENNETT: Trying to think for the banks is kind of a risky prospect these days but especially when you’re looking at, you know, the differences between all of these various programs that banks are considering, whether it’s a short sale or a loan modification or all of the different things that the government is kind of asking them to consider to help homeowners out who are in different situations. It’s not really understandable or explainable why the banks do what they do in many of these situations.

GOLDMAN: And I would add, and certainly circumstances can be very different from one person to another but part of the analysis that goes into what a bank will do, in addition to what Kelly just said, it’s almost impossible to understand their thinking and strategy sometimes. But the bank’s goal is to get the most money they can out of a distress situation. For example, on a loan modification, one of the tests they’ll do is they’ll do a net present value test to see if the net present value of that revised mortgage is greater than what they would fetch on a foreclosure. And if they’ll get more money on a foreclosure or a short sale, they’ll pursue those options instead of a loan modification.

FUDGE: And a loan modification is one of those options that is obviously available to distressed homeowners.

BENNETT: Supposedly, yeah.

FUDGE: Supposedly.

BENNETT: Yeah. Loan modification has been, for about a year, really ramping up but they’re still not capturing most of the people who are trying to get them. There’s a ton of paperwork involved and doing trial periods and talking to your bank and talking about payments and interest and principals and all of those various pieces.

GOLDMAN: And what we’re talking about, actually there’s new rules coming into play on April 5th, the home alternative to foreclosures, the HAFA, and that’s where – so the foreclosure is kind of the last step that a bank would want because they’ll get the least money. But the – So the course is to review the borrower’s situation and the property, the value of the property, and if the borrower won’t be able to be in a sustained loan modification—over half of them fail—then the alternative to a foreclosure includes a short sale or a deed in lieu.

FUDGE: Well, we’ve got a caller who I think has a story about a short sale that did turn into a foreclosure. Julia is in San Diego. Julia, go ahead.

JULIA (Caller, San Diego): Hi. Yes, thank you for taking my call. I was in the process of doing a short sale. I had two short sales pending with Wells Fargo, a subsidiary of Wells Fargo. And Wells Fargo rejected both short sales and then went ahead with the foreclosure process with a short sale pending. And I went to the courthouse during the foreclosure dates and made friends with the auctioneer who told me that the bank was texting him that there was an investor from the bank there to buy the property so that nobody else could. While that was going on, the bank was calling me to do a loan modification. So it ended up, they did foreclose on the property. But I also wanted to make a comment about taxes because people don’t – are not aware that even if you do a loan modification, you are still liable for – or possibly liable for some of that money in your taxes the following year.

FUDGE: Right, you’re taxed for the money that you didn’t pay up on. That becomes a…

JULIA: Correct. Correct.

FUDGE: …taxable amount of money.

JULIA: The amount that was for – if it’s forgiven or whatever. And then also the banks – I just want to make a note, the banks are not – I don’t think they know what they want to do and I don’t think they know how to handle it because they had two different branches of the bank doing two different things at the same time. And then they sent out completely incorrect forms for taxes, the 1099-Cs and the 1099-As were all incorrect.

FUDGE: Well, thank…

JULIA: So that’s my comment.

FUDGE: And thanks very much, Julia. And we’re going to talk about that when we return after a break, the process that banks go through. And why does it take so long? Some of these short sales can just take an incredible amount of time and you wonder why the bank can’t just look at it and say yes or no. But we’ll talk about that when we get back after a break. We’ll continue talking about short sales and so stay tuned and give us a call if you want at 888-895-KPBS.

FUDGE: Coming up in the next hour of These Days, we’ll hear about a play opening in San Diego that was inspired by the legendary political debates between Stephen Douglas and Abraham Lincoln, so stay tuned for that. Right now, we’re talking about short sales, and my guests are Kelly Bennett, who’s a staff writer with voiceofsandiego.org, and Mark Goldman, a mortgage broker and a lecturer at the College of Business Administration at San Diego State University. If you own a house that has lost value because of the housing bust we’ve seen over the past four years and you’re interested in selling, you might have to sell it short, in other words, sell it for less than what you owe to the bank. That’s what a short sale is. And Sunday (sp) in – is the person’s name is in San Diego, wants to talk about it. Go ahead. You’re on the show.

SUNDAY (Caller, San Diego): Hi.

FUDGE: Hi.

SUNDAY: Thanks for taking my call. I’m a realtor and have successfully completed several short sales for both buyers and sellers. And if the loans were original purchase money loans, they’re known as non-recourse paper, so not refinanced, cash out loans, the banks generally cannot come after those sellers, homeowners, to recover those deficiency judgments either in a short sale or in a foreclosure situation if they’ve got that non-recourse paper. But they are able to, and have been in many cases, sending – They’re sending 1099s to those sellers and reporting the deficiency judgment as income for that tax year and so at that point, the State of California has the opportunity to tax it as if it were income to those sellers. And there’ve been some legislation put on the desk of Schwarzenegger and he has declined to sign it. And so the legislation would protect non-recourse paper sellers from having to pay taxes like it would be income. And, basically, in my opinion, that’s coming from – is stemming from the problem that the state is out of money and…

FUDGE: Okay…

SUNDAY: …what’s happening is they’re collecting the taxes now on it as if it were income and they’re saying okay, down the road, if we decide you didn’t owe those taxes, we’ll go ahead and credit that money back…

FUDGE: Okay…

SUNDAY: …but in the meantime…

FUDGE: Okay, thank you. Thank you very much, Sunday. And let’s talk about what gets taxed, and isn’t it a – it is…

GOLDMAN: Well, if I may, Tom.

FUDGE: Well, you go ahead first.

GOLDMAN: When – I would urge great caution in finding out from competent tax counsel or an attorney about what’s forgiven in a short sale. What Sunday was talking about on a foreclosure is accurate but on a short sale where there’s a modification in forgiveness, there may still be liability even if it was acquisitioned.

BENNETT: And talking about the tax question, Sunday brought up a great point in the IRS has granted debt forgiveness without taxation through I think it’s 2011 but the State of California’s comparable law that would forgive the state version of that tax on the amount of money that the bank forgave, you know, of your debt, expired at the end of 2008, so we’re talking about 2009 taxes that everybody’s kind of madly finishing right now, and there are folks who’ve gotten short sale or foreclosures through in the last year who got 1099s from their bank saying, you know, we forgave $75,000 of your debt and that’s considered income to you and you’re going to taxed on that on a state level. Now, Sunday pointed out there’s been some legislation that Schwarzenegger vetoed. He did veto a piece of legislation that a state senator in Davis, I believe, had drafted but the word was that was because of another provision, so the legislature is still working through another sort of clean version of a bill that only deals with this debt forgiveness for foreclosures and for short sales that could potentially sort of retroactively apply to 2009 and maybe even 2010.

FUDGE: So if you did a short sale, if you sold short in 2009, do you owe money to the State of California on what was forgiven or not?

BENNETT: Some – Right now, yes.

FUDGE: Right now, yes.

BENNETT: There’s hope, I suppose, from some of the folks in the real estate industry that the legislature will be working in the next couple of weeks or even beyond. You know, even if you do owe it, you can file – This is certainly not my purview but you can file an extension on your taxes and, you know, give yourself six months or something to wait to see if that legislature will actually come through.

FUDGE: Mark, probably the number one question people have about short sales, if they’ve had any experience with short sales, is why do they take so long? They can take up to ten months. What do banks – Do banks really need to sort of scratch their heads and think about this for ten months before they make a decision?

GOLDMAN: That – I’ll go back to what Kelly said. It’s hard to understand what banks are thinking sometimes. But my experience, it comes down to, really, they’re not putting qualified people in place to make decisions. There’s very poor communication. The banks don’t want to talk to the borrowers. They talk through an agent. The agent is their only point of contact and it – the people, when the borrower or the agents call in, a lot of times they can’t even speak to a person. If they can get a person on the phone, that person’s a very polite customer service agent with absolutely no authority or ability to help anything happen. They can tell you what’s in their computer, which usually is stuff that has been lost two or three times. So they just don’t have policies, procedures and people in place to effect these transactions efficiently.

FUDGE: You’re doing a short sale right now, aren’t you?

GOLDMAN: Yeah, I am.

FUDGE: Aren’t you, Mark?

GOLDMAN: Yes. Yeah, and I can tell you…

FUDGE: How is it going?

GOLDMAN: It’s very, very frustrating. I submitted an offer or we had an offer on the property last August and March 10th I got a letter saying that – thanking me for being a good customer but they were unable to help me. It seems that that buyer bought another house last December. We’ve got another offer in play now and just actually on the way down here my real estate agent spoke to a human being who’s called a negotiator who says that she will move things forward. I won’t believe anything. And to get back to the recourse contracts that Kelly mentioned earlier, anything that they say, I want it in writing before I respond. But it’s very, very frustrating. They ask for papers, you send it in. They have 12 days to receive a fax. You know, I could hitchhike up to the lender’s office and deliver it in person in the time that they take to collect it, and then they lose it anyway.

FUDGE: Well, Kelly, what do you think is going on here?

BENNETT: Well, the – I don’t know, again, but like what Julia was saying, the caller who called in who’d done a couple of short sales – or was trying to do short sales that turned into foreclosures. I think there are just so many departments in these banks, not to mention the fact that if you’ve got a first and a second and you took some cash out, you’re talking about multiple lenders all trying to communicate with each other, all trying to negotiate and get the most money out of the deal. And some of the seconds and the cashout refinance loans have actually sold those – the responsibility for getting that money to collection agencies. So all of a sudden you’ve got the same collection agencies that would call you to tell you you’re late on your credit card calling to get the $3,000 or the $5,000 or whatever it is that they’re going to get out of a short sale. So there’s just so many people talking about one house, one property, and, of course, with a third of the people in San Diego underwater on their mortgages or on their homes, there’s a lot of this happening around the country. So these banks, these big national banks especially, have these giant departments and they’re trying to bring people up to speed on all of the changing rules and all of the changing programs and the new federal stuff that takes effect next week and all of that, and my best guess is that that just makes for a big headache on everybody’s part.

FUDGE: We’ll talk about that federal short sale program in just a minute but first let me remind folks they’re listening to These Days on KPBS. And Kelly Bennett is a staff writer for voiceofsandiego.org. Mark Goldman is a mortgage broker for Cobalt Financial Corporation and a lecturer in the College of Business Administration at San Diego State. Let’s take one or two more calls here. Shavone (sp) is in Rancho Bernardo. Go ahead, and I hope I said your name right.

SHAVONE (Caller, Rancho Bernardo): Yeah, it’s Shavone…

FUDGE: Shavone.

SHAVONE: …and I’m calling from Rancho Bernardo. Thank you for taking my call. I just wanted to bring up the point that I am a purchaser of a short sale home and I’ve been – we made the offer about six months ago and we’ve heard nothing and we were wondering are there any dangers to someone buying a short sale home? What are the issues that we should be aware of?

FUDGE: Mark, I don’t think there are any dangers…

GOLDMAN: Well…

FUDGE: …but there’s a lot of frustration.

GOLDMAN: …there’s frustration and you may have your heart set on a home that you may not get. We find in the loan side of the business that people who have made short sale offers, we want to keep their approvals current and they expire in six months. Your loan approval may have expired two or three or four times in that time period and then you’ll get a call – hopefully, I hope, you get your call that your deal will be accepted and then the banks will respond you can have your deal if you can close in ten days or we’re going to charge you high per diems and your loan approval may have expired, you have to renew the appraisal, your income documentation and so forth. It may not be possible to do it in the time that the bank specifies.

BENNETT: Not to mention interest rates may have changed in that time as well.

GOLDMAN: Yeah.

BENNETT: So your ability to buy that house based on the payment that you expected to be able to buy it, you know, with the offer that you made may have changed with the fact that interest rates are going up and that suddenly your mortgage payment, you know, could be higher.

GOLDMAN: And also the property value may have gone down.

BENNETT: Yeah, so there’s…

GOLDMAN: You may be paying too much for it.

FUDGE: The property value may have gone down.

BENNETT: Or up.

FUDGE: I think at the end of April there’s going to be the expiration of a federal tax credit of $6,000 to people who are buying homes and so as time goes by, that short sale may get less and less attractive, I think is what we’re saying. Let’s go to John in La Jolla. John, go ahead.

JOHN (Caller, La Jolla): …a real estate agent but also a short sale negotiator, and I partner with other listing agents to successfully conclude short sales. And I’ve only actually not successfully completed one or two out of about 25 to 30 that I’m doing.

FUDGE: Wow, you’re doing well.

JOHN: And – Yeah, and I think I just wanted to clear up a few things that we live in a non-judicial state which means in order for a lender to get a deficiency judgment against you, using those words very carefully, that they would have to do that in a judicial foreclosure scheduled ahead of a foreclosure or ahead of a trustee sale. And not too many second lenders or second mortgage lenders are going to do that, go to the time and trouble and effort and money because of the, you know, the value. The value’s not really there to support it. So if you’re in a recourse loan and the second’s going to take what the first is going to give them, which is usually the case, but like your audience and your commentators have said, can be five to ten percent, basically what you want to do is get the language—and that’s where I come in as a negotiator for the client selling the home—is get the language in the approval letter that says this is all of their demand or all of their rights to any type of deficiency. In other words, the approval is based on this is it, there’s no more recourse, there’s no more – they can’t come after you, and you want that kind of language in the approval letter. If it’s not in there, I recommend not signing it because more and more lenders are giving that up…

FUDGE: Okay. Okay, John, thanks very much. And I think we’re just going to let your comment stand as it is because I do want to raise one more quick subject before we run out of time. Kelly, next Monday the federal government is getting involved in short sales in a way that they haven’t in the past. What are they trying to do?

BENNETT: Well, they’re actually trying to kind of grease the wheels for these to get the banks to agree to them more efficiently and to even incentivize it further and that is a lot of – there’s a lot of pieces to that but one is that they’re actually going to pay the servicer and the banks and the actual homeowner to do a short sale. So if somebody’s loan modification or some other effort that they pursued to get, you know, to get into a better situation in their home isn’t working or it just doesn’t make sense for the bank to grant that, the servicer could get a thousand bucks, the bank could get a thousand bucks, and the homeowner who’s trying to sell short could actually get I’ve seen anywhere between $1500 and $3000 for relocation assistance. So…

GOLDMAN: There’s also a one-to-three contribution to a payoff on a second mortgage, too, in the works.

BENNETT: So there’s all sort – and there are requirements along the lines of what John was saying. There are – It appears to me that the federal government is trying to make some sort of uniform policy in the way that short sales are done, which is a long time coming, years in the making, because we’ve been talking about short sales since 2007 and they’re all – and it’s kind of the wild west of the loan modification world.

FUDGE: Kelly, you talked to somebody who said that 2010 will be the year of short sales.

BENNETT: Right.

FUDGE: Is that good news?

BENNETT: That – I think that depends on the success of this program. And if it’s anything like loan modifications, I’m going to believe it when I see it. There’ve been some major, major hiccups and trouble with some of the federal programs that have tried to ease this a little bit. But 2010, year of short sales, could be good news for buyers who are able to potentially move into property sooner than they would if it had to go all the way through foreclosure.

GOLDMAN: I would agree, and I also think that the neighbors who – the sales comps will be higher than a foreclosure sale, so that’ll be a good thing, also. By the way, the new HAFA rules also require participating servicers to a full release of lien and note.

BENNETT: So that’s what John’s talking about. You know, you want to make sure that if you are doing a short sale, that in writing it says this is it, this is the last bit that the bank can get from me as I’m moving on from this home.

FUDGE: Okay, Kelly Bennett is a staff writer for voiceofsandiego.org. Kelly, thank you very much.

BENNETT: Thank you.

FUDGE: And Mark Goldman is a mortgage broker for Cobalt Financial Corporation. He’s also a lecturer at the College of Business Administration at San Diego State. Mark, thank you very much.

GOLDMAN: Pleasure to be here.

FUDGE: And thanks to all of you who listened and to those of you who called in. And stay tuned now as These Days continues.

Comments

Avatar for user 'jhackettca'

jhackettca | April 1, 2010 at 12:20 p.m. ― 4 years ago

I want to say how much I appreciate your efforts to inform the public about the plight so many homeowners are in. I myself have been through the short-sale process and it is a nightmare of misinformation, greed and heartbreak.

I called in earlier but couldn't talk on the air. I wanted to bring to your attention what was said on the March 22 show regarding purchase money mortgage debt and refinanced mortgage debt, otherwise known as non-recourse and recourse debt.

Your panelist Brenda Voet of the Franchise Tax Board stated on March 22nd, "...you(r) caller mentioned that it was the original debt on the home, and that could make it so that it’s not taxable for California also because there are two different kinds of debt that are normally securing the purchase of the mortgage. One is a recourse debt and the other is a non-recourse debt. When most of us bought our home, we bought into a note that was a non-recourse note and basically that said that all the financial institution can do is come after your home as security." (transcript at http://www.kpbs.org/news/2010/mar/22/...)

California is a non-recourse state, borrowers are not held personally liable for more than the home’s value at the time that the loan is repaid. The lender may recoup some of its loss through foreclosure or short-sale. However, the lender may not sue the borrower for additional funds. If the foreclosure sale does not generate enough money to satisfy the loan, the lender must accept the loss. These laws apply only to 'purchase money' loans (i.e. original home loans that are used to purchase property) in California.

Once a borrower refinances or takes out an equity line of credit the new loans are recourse loans. The legislation pending in California would help those people who are under water with these types of loans.

This is all very complicated and everyone's situation is different. A lot of banks are unaware of State laws and regulations and provide borrowers with misinformation. Additionally new rules and programs come out almost daily and add to the confusion. For many this creates false hope as they try to hang on to a home they never really owned. These are killer mortgages that will only drain borrowers of their money, dignity and dreams.

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Avatar for user 'KenE'

KenE | April 1, 2010 at 5:30 p.m. ― 4 years ago

After listening to your program, I was dismayed that no one undestood what a bank does with mortgage loans. Every contributor seemed amazed that the bank would not work with them. Even your short sale experts didn't understand why they got what they did. Next time you you want to inform on this subject forget the realtors, lawyers, and negotiators. Talk to a bank. They may try to whitewash the hard truth which is coming under increasing pressure politically but they have gone through this before many times in the past. The loans are not just one department or 1 or 2 people. Past practice has taught the bank to specialize in the various steps of the loan process, closing, packaging, servicing, loss mitigation, and legal. Talking to one department doesn't mean that everyone is on board.

Look at the bigger picture next time. It may give your listeners a better understanding of why the banks do what they do.

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