Until 2008, most people had never heard the term “short sale.” Unfortunately, in the years since, it has become a phrase that almost everyone is familiar with.
So, what is a short sale? Put very simply, a short sale is any sale that doesn’t net enough money to pay the underlying lienholders everything they are owed. For example, if you bought a home in 2006 and wanted to sell it in 2012, in all likelihood it would have been worth substantially less. Unless the seller has the cash to bring to the table to solve that shortage, they will have to ask the lender to accept a “short” amount.
Why would a lienholder accept less than what they are owed? There were many reasons, particularly in a declining market. If they didn’t want to accept the “short” amount, the lienholder’s only other option was to foreclose on the property, which is a time-consuming and expensive process. If the foreclosure process took nine months or longer to complete, the property was almost certainly going to be worth less because values had continued to decline. In an attempt to cut their losses, many lenders simply accepted a smaller amount than they were owed. That is why we saw so many successful short sales between 2008 and 2012.
Things are changing in today’s market, though, and it is directly impacting people’s ability to do short sales. The time-pressure banks were feeling before has gone away in a market where prices are rising.
Now, if the lender looks at a short sale versus a foreclosure, foreclosing becomes a more attractive option. If the banks believe the home will likely be worth more nine months down the road, they have no impetus to settle early.
This is impacting homeowner’s ability to achieve a successful short sale. Here on the Plateau, I am seeing fewer and fewer short sales being completed. Unfortunately, if a homeowner is substantially behind on a mortgage, this potentially removes at least one option for resolving the situation.
What’s left? A homeowner can offer a deed in lieu of foreclosure, which allows them to simply turn the keys over to the lender and walk away. In the recent past, lenders have not wanted to accept those easily, but a rising market may make that a more attractive option.
One final option is to speak directly to the bank and see if a loan modification that changes the terms of their mortgage is possible.
The best news I’ve seen is a report that says far fewer people are missing that first mortgage payment in 2013. If fewer people are falling behind, we will need fewer methods for dealing with homeowners who can’t stay current. After five years of fallout from the mortgage meltdown, everyone can use the breather.