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Fixing California’s Short Sale Problems

Written By:
April 15, 2011 at 3:38 PM

Over the last three years, the California Association of Realtors estimates that nearly 640,000 homeowners in the state have lost their homes. Currently, three out of ten homeowners find themselves upside down with their mortgages. With real estate values having dropped like a rock for the past three years, and a fragile job market, many people still find it difficult to pay their monthly mortgage.

Numerous residential property owners avoid foreclosure altogether, or, even if they can pay their mortgage, seek financial relief through “strategic default.” Strategic default occurs when homeowners simply walk away from their homes. Increasingly, more people have sought to relive themselves of the financial burdens of underwater mortgages by short sales.

Increases in Short Sales

Short sale refers to selling the home for a price lower than the outstanding mortgage. In 2009, over 18% of residential real estate transactions in the Southern California market consisted of short sales. The figures for January 2011 showed that short sales comprised just over 27% of dealings.

Typically, homeowners must provide proof of financial hardship to sell their home for less than the outstanding balance of the mortgage loan. The consequences of a short sale mean the homeowner lose any money invested in the down payment or renovations. In addition, the person's credit score suffers, but less than if a foreclosure appears on the credit profile.

Expect to have difficulties when it comes to borrowing money and do not forget the possible tax consequences. Nonetheless, it seems getting banks to act promptly and agree to deals - by accepting lesser amounts than outstanding mortgage balances, have torpedoed a significant number of deals.

Short Sale Issues

According to California Association of Realtors, 70% of the real estate agents responding to a survey stated that the short sale process was too complicated. In fact, even with ready, willing, and able buyers, only 57% of short sale transactions actually closed. The differences among mortgage loan agreements, and other issues, make it difficult to standardized short sale procedures. Some of the elements that come into play include:

  • Whether the home has a second mortgage.
  • Loan servicer wiliness to forgo foreclosure charges and fees
  • Lenders losing paperwork
  • Waiting for lenders to make decisions

Some real estate agents report mortgage lenders or loan servicers have taken as long as 90 days before responding to a short sale offer. Even if all possible impediment listed above were met, mortgage lenders can reject short sale offers they consider “too low.”

Improving Short Sale Procedures

Many industry professionals think that making short sales easier can play a significant role in helping to reduce the huge inventory of bank-owned homes that have a strangle hold on the housing market. The California Association of Realtors has made an appeal to individuals, politicians, federal regulators, mortgage lenders, government-sponsored enterprises, and not-for-profit organizations. Each have a financial interest in the state's economic viability and can help ease the short sale process.

Some possible solutions put forth by the include

  • Put short sales on a fast track
  • Simplify the Home Affordable Foreclosure Alternatives Program short sale guidelines
  • Hire additional staff to service short sale transactions
  • Improve the communication among various stakeholders

In addition, the California Association of Realtors offers training to its members to enable them to assist homeowner through the process.

Like the rest of the nation, California's economic future hinges on a variety of factors, including, job creation, debt resolution and housing market stability. Fixing the short sales process not only benefits many struggling homeowners, but helps banks move non-performing assets off its books. This move alone will not resolve the state's economic quagmire, but can help crack open the door to a future recovery.





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