Walking away with less
...deal is called a short sale, and it's sweeping the country. In these deals, a lender allows a troubled borrower to sell a home for less than what's owed on the mortgage. Completed short sales have more than tripled since 2008, and 400,000 of these deals are projected to close this year, according to mortgage research firm CoreLogic. The giant mortgage financier Fannie Mae approved short sales on 36,534 home loans it owned in the first half of the year, nearly triple the number in 2007 and 2008 combined. Freddie Mac, its sister company, approved 22,117 in the first half of 2010, up from a mere 94 in the first half of 2007.
The Washington Post
Walking away with less
By Dina ElBoghdady and Dan Keating
A new wave of distressed home sales is rippling, more quietly this time, through American cities and suburbs.
Its unsettling effects are playing out here in Manassas, along Brewer Creek Place, a modest, horseshoe-shaped street lined with 98 brick townhouses. Several years after the U.S. foreclosure crisis erupted, the U-Hauls are back.
The last time, banks seized nearly every fourth house on the street through foreclosure. This time, homeowners are going another route: a short sale.
"I love this house, but I just have to leave," said Leanna Harris, 27, the owner of a corner unit that used to be the builder's model, with a stone path in the yard and a gourmet kitchen. "I'm at peace with it now."
The original owner bought the home for $400,714 in 2006; Harris and her husband, both bartenders, paid what seemed to be a bargain price, $289,000, in 2008. But they have fallen behind on their mortgage payments, in part because her husband was out of work. Now they have a $246,000 offer for the home, and the balance on their mortgage is more than that. They want to accept the offer. All they need is their bank's okay.
That kind of deal is called a short sale, and it's sweeping the country. In these deals, a lender allows a troubled borrower to sell a home for less than what's owed on the mortgage.
Completed short sales have more than tripled since 2008, and 400,000 of these deals are projected to close this year, according to mortgage research firm CoreLogic. The giant mortgage financier Fannie Mae approved short sales on 36,534 home loans it owned in the first half of the year, nearly triple the number in 2007 and 2008 combined. Freddie Mac, its sister company, approved 22,117 in the first half of 2010, up from a mere 94 in the first half of 2007.
Distressed homeowners are being drawn to short sales in large part because they can help protect a borrower's credit rating and thus the chance of buying another home later on.
"I worked hard for a long time to keep my credit score close to perfect, and I know a foreclosure would be much worse for my credit than a short sale," said Harris, who listed her Brewer Creek Place home as a short sale about a month ago. "If there's a chance we can avoid foreclosure, we'd rather do that."
In a short sale, homeowners must get the go-ahead from the mortgage lender. Sometimes that happens before the property is put on the market, and other times before the deal closes. Walking away with less
In some areas of the country, including the Washington region, lenders can later pursue borrowers for the difference between the proceeds collected from the short sale and the amount owed on the mortgage, also called a deficiency. But lenders say they only do so if they conclude the borrowers skipped out on a loan that they could afford.
For lenders, short sales are less expensive than foreclosures to handle and help ensure that homes transfer in good shape. And for the wider real estate market, these sales could help shore up the floor under housing values because homeowners - unlike with foreclosures - have a vested interest in getting the best price. That's because the higher the offer, the more likely the lender will approve the sale.
But short sales are prone to maddening delays and often fall through because they require the approval of many, often-competing parties - including the primary mortgage lender and in some cases the holders of second and third liens.
Across the Washington region, short-sale listings now far outpace the number of foreclosures available for sale, according to RealEstate Business Intelligence, a subsidiary of the local multiple listing service. About 14 percent of area homes for sale are short sales, more than double the figure for foreclosures, with some of the greatest volume in Prince George's and Prince William Counties, where the drop in housing prices has been especially pronounced.
Brewer Creek Place, which wraps around the back end of the Independence subdivision south of the Prince William Parkway, was first developed five years ago on the eve of the housing market meltdown. Most of the residents bought their townhouses at a time when mortgage lending standards were especially lax, leaving some borrowers saddled with staggering debts when the home-loan market collapsed.
Yet along the street, there are few signs of the turmoil. Kids zip around on scooters. Neighbors primp their flower beds.
But from her driveway, Brenda Holliday has watched the crisis spread. Taking a break from hosing down her convertible PT Cruiser on a recent Saturday, she pointed to the three homes to her right. Each had sold as a foreclosure since 2008.
Then she pointed to the door to her immediate left with a lock box hanging on it.
"That's a short sale," she said. She nodded to the corner unit further down the block. "I think that's a short sale, too."
To Holliday, 60, her townhouse seemed ideal when moved in four years ago shortly after she was widowed. She's been renting the place from the owner with half of each monthly payment credited toward her eventual purchase of the home, which she initially agreed to buy for $365,000.
But as she's grown older, the stairs have gotten harder, she said, and now she feels a bit trapped. If she leaves, she loses the money she put toward the purchase. If she stays, she'll have to pay about $150,000 more than the townhouse is worth. Its value has been eroded by the steady stream of foreclosures and short sales.
Holliday squeezed the hose full throttle.
"A moving van pulls up and another family is gone - that's all I know," she said. "It's plain sad."
Leanna Harris may have been the first on the street to buy a home as a short sale. When she did, in early 2008, such deals were so rare that Prince William County hadn't even started to track them yet.
"I wanted this house really bad," said Harris, who went to settlement on the home the day after their baby girl was born. "It is my dream house."
But before long, she and her husband were looking at a short sale from the other side. The Harrises fell behind on their payments and never regained financial footing, she said.
The couple received temporary relief for six months from Bank of America. But Harris said the bank ultimately rejected them for a permanent loan modification and threatened foreclosure unless they immediately made up the $10,000 in payments that had been deferred, including interest and fees, or sold the house.
Harris said she felt tricked. But she listed her home as a short sale because it seemed to offer a relatively painless way out. She said she doesn't expect the bank's approval to come quickly.
Lenders acknowledge that they are overwhelmed with the volume of short sales coming their way.
"It has taken considerable effort to build up the capacity to do these [short sale and modification] processes and also to connect them together," said David Sunlin, a senior vice president at Bank America. "We're adding staff and vendors and technology."The giant mortgage financier Fannie Mae approved short sales on 36,534 home loans it owned in the first half of this year, nearly triple the number in 2007 and 2008 combined. Freddie Mac, its sister company, approved 22,117 in the first half of 2010, up from a mere 94 in the first half of 2007.
The Obama administration, meanwhile, has been seeking to encourage even more short sales as a way of reducing the nation's inventory of vacant and abandoned properties.
In April, the administration launched a program that financially rewards lenders and borrowers for successfully negotiating a short sale if the borrower's loan could not be modified through the federal government's year-and-a-half-old foreclosure prevention effort. Lenders receive $1,500 and borrowers another $3,000 for moving expenses. Under the initiative, all eligible borrowers must be notified of the option to sell their homes short before their loans are referred to foreclosure.
The Treasury-run program also sweetens the deal for borrowers by relieving them of any obligation to repay a deficiency.
Clearing the way for a short sale has often proved cumbersome because there can be so many parties to a potential deal. Aside from lenders, transactions may also have to be green lighted by investors who own the mortgages, local tax authorities, appraisal firms, escrow companies, homeowners associations, mortgage insurance companies and subordinate lien holders.
That's why the administration cannot simply order a lender to approve a short sale, said Laurie Maggiano, policy director at the Treasury Department's homeownership preservation office.We have to give servicers discretion to make intelligent business decisions as to which properties are likely to be successful short sales, rather than say everybody has to get one," she said.
It can also be difficult to persuade lenders to participate, because of the risk. According to Frank McKenna, a vice president at CoreLogic, the industry is on track to incur about $310 million of unnecessary losses on these transactions every year.
Monica Valladares, 29, has been trying to offload her home on Brewer Creek Place for more than a year.
She bought it new for $329,000 in 2006. Keeping up with her mortgage payment was easy when her three roommates - her grandmother and two cousins - were chipping in. But the arrangement fell apart, the family scattered and Valladares, a single mom, said she could not afford the home on her salary as a researcher for a telecommunications company.
In early 2009, Valladares listed the townhouse as a short sale for the first time. The home, overlooking a wooded lot and playground, quickly attracted multiple offers. The highest was $220,000, she recalled. She moved out, thinking the turnaround would be quick. But her agent could not get the bank to review even the most lucrative contract, she said.
When the potential buyers dropped out about six months later, Valladares applied to Bank of America for a loan modification that would reduce her payments. A few months later, Valladeres was told she did not qualify, she said.
Desperate, Valladares tried the short-sale route again.
"I don't know what else to do, what else to try," Valladares said during a recent visit back to the vacant town home. "This house is damaging my credit big time."
Within days, she received a $220,000 offer.
When she called her primary lender to get approval for the deal, however, the bank said she wasn't eligible for a short sale because she had been enrolled in a loan modification program after all, Valladares recalled. Straightening out the confusion took weeks. The lender finally agreed to the sale. But there were more obstacles. For one, the homeowners association said Valladares must pay $4,000 in dues and late fees before it will clear the sale, she said, adding she doesn't have the cash.
Yet another problem is that Valladares had taken out a second mortgage to help her finance the original purchase of her townhouse. The lender on that second loan has yet to approve the short sale, said Roger Derflinger, her current real estate agent.
"The offers come quick," Valladares said. "It's the bank that's slow."
Staff researcher Alice R. Crites contributed to this report.