Short Sales – The New Norm in Real Estate?

With the continuing economic issues in the housing market, many real estate transactions are now short sales.  For the homeowners, avoiding a foreclosure on their credit is a big advantage.  For lenders, foreclosures are more expensive than short sales, 30 percent more according to the Mortgage Bankers Association. So short sales appear to be a better solution for everyone.  But why can’t lenders approve short sales quickly? 

In reality, there are often the other parties in the transaction that are causing the delays.  Since many homes were purchased with secondary financing, if the first lender is taking a loss, the second, and any other lenders, are also taking a loss.

As a lender on the property, these secondary lenders are required to approve the short sale.  A common request from secondary lenders is to ask for 10% of their outstanding loan value in exchange for their approving the short sale.  Although the first lender may be willing to allow the second lender to receive this amount, another party may be involved – the PMI company. 

In general, when a buyer purchases a home with a loan greater than 80% of the value of the home, the lender requires private mortgage insurance or PMI.  Then if the borrower defaults on the loan, once the lender determines the amount of their loss, they can make a claim to PMI.  But if PMI is on a home that is being sold as a short sale, the PMI company also has the right to approve the sort sale. 

The private mortgage insurer may have provided guidelines for acceptable losses that the lender can approve, so each deal may not require individual approved by the PMI company.  But if the market value is too low or requests by the secondary lenders create losses to the lender that are outside of the PMI guidelines, the PMI company will need to approve the individual short sale.

And if all of this isn’t enough, some PMI companies are asking borrowers to sign notes to cover the shortfall in the case of short sales. 

To be fair, many lenders and PMI companies are actively working to speed up the approval of short sales, but given all of the parties involved in each short sale, you can see why the approval of the sale and process itself is such a mine field and so time consuming.

If you’re a troubled homeowner, contact me so that we can start the process correctly and get you the best outcome.

Copyright 2010 by Robyn McKeon Powers