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Recently, the U.S. Treasury announced some new measures to assist homeowners that are having trouble making their mortgage payments.  They specifically address two areas of concern with programs aimed at alleviating some of the roadblocks that these borrowers are facing.

One of the focuses is on loan modifications.  This is a scenario where the lender modifies some aspect of the borrower’s loan terms in the hopes that they can avoid default.  They might lower the interest rate, forgive a portion of the principal or remove late fees or extend the term of the loan - among many other possibilities.  Unfortunately, the number of loans that have been modified over the past 9 months since the Treasury first implemented a program to help them along has been much less than hoped.  Additionally, the percentage of loans that were modified, yet ended in re-default is very high so banks are hesitant to modify loans at this point.   Some will argue that the ‘system’ is at issue for the re-defaults while others argue that the banks are not modifying loans in a truly useful way.  Hopefully Treasury will help to work through some of the issues that are making this process and its results less than desirable.

This brings us to another area of concern that Treasury addressed on Monday – Short Sales.  A short sale is when a lender agrees to accept an offer on a property sale that is less than what is actually owed on the property (or ‘Short’ of the loan amount).  When buyers are looking for a ‘deal’ or a ‘foreclosure’ they are typically not planning on going to the foreclosure auctions at the courthouse since the purchasing requirements there are often out of their reach and the risk that the condition of the homes will be beyond acceptable are just too great.

Often, the ‘deals’ can be found in short sales.  These types of sales are often listed in the multiple listing service and a good Realtor can help you sort through all of the listings to find some of these gems.

If you’ve ever made an offer on a short sale (or know someone who has) you are probably aware that the process can take a very long time in most cases.  In fact, many first time buyers looking to take advantage of the initial tax credit that expired last November were often put in a bad position because they would have an offer in on a short sale property as early as August, for example,  but the process dragged on for months – potentially eliminating their ability to utilize the tax credit.

Now, from an investor/lender perspective, we can all surely understand their reason for being hesitant to allow a home to sell for less than what is owed on the property.  This creates huge losses for them and if you multiply this by how many short sales there are right now you can see that effect magnified.  However, many will argue that there is value in getting these troubled loans off of their books and saving money on the foreclosure process. 

Either way – the process is taking way too long in most cases.

The new legislation mandates that a lender must now render a ‘yes’ or ‘no’ decision within 10 business days for any bonafide short sale offer.  This should help many buyers and sellers in two distinct ways:

1.  Buyers will know the lender’s decision quickly so they can move on to another property if their current offer is not accepted.

2.  Buyers will know if the offer was accepted and can move forward with the transaction much more quickly.

While this is good news for buyers, sellers and even lenders alike we still need to see if the ‘law of intended consequences’ rears its ugly head.  Because so many banks are ill-prepared for the volume of short sale and modification requests they are currently getting – from both a staffing and systems perspective – they may default to giving a blanket answer of ‘no’ within the 10 days required by the new law just to stay in compliance.  A rubber stamp answer like this will keep them from experiencing any penalties that the law mandates because they will be providing their answer within the specified time.

Hopefully this will not be the case, but your best defense against this scenario is to work with a seasoned Realtor and Loan Officer who can guide you through the process and help develop an offer for your property that will give it the best chance of being accepted.

In the event a lender says that they will not accept the short sale offer, at least you know you can move on to find another property quickly.  With time ticking on the expiration of the new Home Buyer Tax Credit, timing will surely be a major consideration in your home search.

Happy House Hunting!!

Jason Klaskin