Net Worth: Feds streamlining 'short sale' of homes

The federal government and some banks are trying to make it easier for stressed homeowners to sell their home for less than they owe, a transaction known as a short sale.
This month the Treasury Department said it is creating a streamlined, industry-wide process for short sales and will pay bonuses to certain borrowers, loan servicers and second-lien holders to do them.
The Bank of America, the nation's largest home-mortgage service company, last week announced that it has two programs "in the pilot or planning stages" to expedite the process, mainly by identifying short-sale candidates in advance and setting preapproved prices at which short sales can take place.
Because short sales can have negative tax or legal consequences, homeowners should consult an attorney and accountant experienced in real estate before doing one.
In a short sale, a homeowner who is underwater on a mortgage finds a buyer for his house and sells it for less than the debt owed. The seller turns the sales proceeds over to the lender, which agrees to release its lien on the property.
At closing, the lender might require the seller to sign a note for or contribute to the difference between the sales proceeds and the loan balance. This usually depends on whether the lender thinks the homeowner has the financial wherewithal to make up the difference.
"In most of these short sales, you will see a very abbreviated document from the lender. It essentially says, 'We agree to let this short sale go through,' with an asterisk. The asterisk says, 'We reserve our right to obtain the balance of the funds we didn't get from the short sale from you personally after the sale,' " says William Purdy, a real estate attorney in Soquel, Calif.
In some cases, short sales are better than foreclosures for homeowners, neighborhoods and lenders.
Homeowners avoid an eviction, and the impact on their credit report might be somewhat less onerous than a foreclosure. Neighborhoods benefit because there are fewer vacant houses falling into disrepair. Lenders avoid the legal fees, maintenance costs and sales commissions associated with foreclosure.
But handling a short sell is arduous, time-consuming and usually unsuccessful.
Historically, only 30 to 35 percent of short-sale offers get approved, usually because the lender thinks the offer is below market value or the homeowner has not submitted the required documentation, says David Sunlin, a senior vice president with Bank of America.
Of those that are approved, about 60 percent fall apart before closing, often because the buyer has given up or can't get financing, Sunlin says.
At Bank of America, it typically takes 45 days to get a short-sale offer approved or denied. If there is more than one mortgage on the property, the process is more difficult because all lenders must agree.
Given the time, complexity and low success rate, many real estate agents won't handle short sales, especially because lenders often want them to discount their commissions.
Zillow.com estimates that short sales accounted for 11.9 percent of all U.S. home sales in the 12 months ending March 31, up from 10.9 percent in the 12 months ending Dec. 31.
On May 14 the Treasury Department announced a plan to "provide incentives for servicers and borrowers to pursue short sales" in cases where the borrower is generally eligible for a modification under the federal government's Making Home Affordable plan, but either can't qualify or gets the modification but can't keep up the payments.
In these cases, Treasury will pay a servicer $1,000 for completing a successful short sale, it will pay the borrower $1,500 to assist with relocation expenses and it will pay second-lien holders who release their claims up to $1,000.
Bank of America also is trying to streamline and shorten the short-sale process. It has increased staffing and created a dedicated short sale call center at (866) 880-1232.
Wells Fargo also says it has improved its short-sale approval process in the past year.
"We strongly recommend that our customers who wish to consider a short sale contact us before or shortly after they sign a listing agreement with a real estate agent," says David Knight, senior vice president for default and retention operations.
Consumers should know exactly what they're getting into before doing a short sale. In California, if the lender wants to come after you for the unpaid balance and you have never refinanced your loan, you might be better off going into foreclosure, Purdy says.
That's because a loan used to buy a primary residence that has never been refinanced is non-recourse debt in California. If the lender forecloses, it cannot come after your other assets for the unpaid balance. If a lender agrees to forgive some of your debt, you could -- in certain situations -- be liable for income tax on the amount forgiven.
Borrowers should try to find out how the short sale will affect their credit report and score. There is no code for reporting short sales on a credit report like there is for foreclosures or bankruptcies. Lenders and credit bureaus may report it differently.
The industry standard "is to report a special comment, which indicates that an agreement was reached between the lender and the consumer to accept an amount less than the full balance," Equifax says.
A prospective lender looking at your credit report might decide a short sale is less negative than a foreclosure.
But a short sale will have the same impact on your FICO credit score as a foreclosure, says FICO spokesman Craig Watts. The FICO scoring formula treats any account that is closed and not paid as agreed "as a serious delinquency," he says.
E-mail Kathleen Pender at kpender(at)sfchronicle.com.

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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