Mortgage woes spur short sales
Imagine finding the perfect home and being the first to submit an offer. Then imagine waiting up to six months to learn the offer has been rejected.
That scene is playing out more often as struggling homeowners try to unload their properties -- or short sell them -- before the banks foreclose on them.
The problem is not finding the buyers, but rather, getting reluctant mortgage lenders to agree to the practice of letting homes sell for less than the mortgage owed.
One state housing official said mortgage lenders are essentially prolonging the housing slump by rejecting short sales and instead foreclosing on the properties. The market will take longer to recover if foreclosures abound, said William Ariano, who oversees community development at the Maryland Department of Housing and Community Development.
Ariano said the state housing department has met with some of the state's mortgage lenders to convince them to allow short sales to go forward, even though the state cannot force the lenders' hands.
"Their practices, at this point, are to do everything they can not to go through a short sale," he said.
Pre-foreclosure and short sales now account for as many as one in five home sales nationwide, according to a new study by Bethesda's Inside Mortgage Finance.
Though the data for Maryland is not available -- short sales aren't recorded differently from normal sales -- the practice is growing here as the number of foreclosures rise.
Statewide, about 5,809 new mortgages went into default for the first quarter, up 17 percent from the past three months of 2007.
Real estate experts and state officials say as the number of mortgages that have gone into default increases, so does the number of homes listed for short sale. Those sales are taking longer than normal to complete, leaving the seller and hopeful buyer in limbo while mortgage lenders take more than 120 days to consider whether to OK the sales. Many of those sales are being rejected because lenders opt instead to take possession of the homes.
A short sale is one in which a home is sold for less than the balance of the mortgage owed on it. A pre-foreclosure sale can also be done by a homeowner to avoid foreclosure, but in that case the home is being sold for more than the amount of the mortgage owed.
In many cases, the homes are being sold by owners who have gotten in over their heads, cannot afford their monthly mortgage payments, are facing foreclosure and are unable to refinance their mortgages.
Many residential real estate agents in Greater Baltimore are finding the sales are prolonged by as much as two months, and in some cases they're being rejected outright.
The problem, Ariano said, is that the mortgage lenders who must sign off on those sales tend to be reluctant to sell the properties for less than the mortgage is worth.
The lenders often take months to crunch the numbers and decide if they would rather foreclose.
The situation is frustrating the sellers and the people hoping to buy those homes, said Cathy Werner, president of the Greater Baltimore Board of Realtors.
"Because of the subprime, because of the current mortgage situation, it's a different issue than we have dealt with before," Werner said.
Many of the lenders doing business in Maryland are reluctant to sell short, Ariano said, for any number of reasons. Among them, lenders in Greater Baltimore might be more inclined to foreclose on a property and ride out the market until home values start to rise.
Debora Blume, spokeswoman for Wells Fargo Home Mortgage, said mortgage lenders have guidelines for when they will consider a short sale, including a floor, or minimum amount, they will consider selling the properties for.
Wells Fargo, for example, looks at factors including the selling homeowner's financial status and the reasons why he or she is not able to keep up with monthly payments.
The increasing number of foreclosures has forced many banks to determine whether they would be better off refinancing mortgages to keep homeowners in their homes or, by default, acquiring extensive portfolios of foreclosed homes. Short sales can be a better alternative under some circumstances, said Dan Coleman, regional vice president of Coldwell Banker Mid-Atlantic Title.
"Lenders don't want to be property owners, so they are willing to entertain them," Coleman said. He opened the branch in December as a referral service for Coldwell Banker Residential Brokerage agents helping their clients buy short-sale and foreclosed properties.
For the first three months of 2008, the group had between 30 and 40 new cases. In April and May, with one month left in the second quarter, there were between 80 and 100 new cases, Coleman said.
Many of the situations are emotionally fraught, said Veronica Schultz, regional vice president for Coldwell Banker Residential Brokerage. As frustrating as the process can be for the hopeful homebuyer, it can be more painful for the seller who is forced to sell.
"I don't think anyone ever goes through a real estate transaction wanting to go through this," Schultz said. "It's their home, and with short sales, the personal element is certainly a big challenge."
In many cases, the process is complicated because the seller is too embarrassed to disclose he or she is delinquent on mortgage payments, said Bill Cassidy, a real estate agent with Long & Foster in Baltimore City.
"Good communication has got to be the key up front," Cassidy said.
Real estate agents can find that information with the help of an attorney or a title company, Cassidy said. But that can add time to a process already complicated by the role of the third-party lender.
For Mike and Erin Hans, the process took about seven months, from October to May. During that time, the Hans family put in a $275,000 bid for a home near the Baltimore County line in the city's Lake Walker neighborhood. Their offer, which was $25,000 less than the asking price, was rejected and the Hans family all but wrote off the home. After learning the home's asking price was going to be reduced, they put in a second bid of $220,000, which was about $15,000 less than the reduced asking price. That bid was accepted.
"It takes a lot of patience," Mike Hans said.
Still, said Erin Hans, short-sale properties are often priced less than other homes, allowing buyers to buy more for less. The Hans were hoping to upgrade to a home with a bigger yard.
"We have a 3-year-old, and the primary reason was having enough space for her to run," she said. "The more we thought about it, we thought this was a great opportunity to buy a house that we normally couldn't afford."
For that reason, they were willing to put some work into the new place, including cleaning up mold, waterproofing the home and putting in a new roof, siding and kitchen. It cost them about $11,000 to tend to the mold and waterproofing issues before their lender would sign off on a mortgage for the property.
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