2010: Year of the Short Sale?

Short Sales: Hurdles and Consequences

Short sales continue to be a huge factor in the Twin Cities housing market.

How do I know?

I've been showing a new client who's a first-time Buyer properties within 5 miles of South St. Paul the last few weeks, literally from Maplewood to Cottage Grove. Out of perhaps 100 homes I've screened online that met the client's criteria (price, square feet, number of bedrooms and baths, etc.), I'd estimate that more than two-thirds were "potential short sales."

In fact, the percentage is likely even higher, because invariably when the MLS field asking for short sale status is left blank . . . the home is a potential short sale.

Even taking into account the lower bracket price range (under $200k), those numbers are staggering.

New MNAR Form

Another sign that short sales loom large is a new form that the MN Association of Realtors has rushed out to help Realtors and their clients deal with potential short sales.

The forms lists the following seven "risks and ramifications":

1. Failure to obtain approval from all lender(s)/creditor(s) with a mortgage/lien against the property may prevent the sale from closing.
2. Short sale approvals from all lender(s)/creditor(s) are time consuming, may delay closing, and may not be accomplished within expected timelines.
3. Creditors will likely require disclosure of personal assets and financial records, including copies of tax returns, to determine approval of a short sale.
4. A short sale may require seller to pay off some or all of the amounts owed after closing.
5. Seller's credit will be impacted as a result of a short sale transaction.
6. Seller may incur tax consequences as a result of a short sale.
7. The approval of a short sale is never guaranteed.

Got all that?

Neither do most Sellers.

In fact, the form goes on to recommend that the prospective short seller consult with appropriate "tax, financial, and legal advisors" to determine if a short sale is appropriate.

My guess is that someone too financially strapped to pay their mortgage either doesn't have an attorney or accountant -- or doesn't have the money to pay them.

No wonder something like 75% of all short sales progress to foreclosure.

Alternative Financing: Back to the Future?

Contracts for Deed & Assignable Mortgages

Last Fall, Edina Realty's excellent legal department identified FHA loans and short sales as the two, big looming issues for Realtors to prepare for in 2009.

Good call.

So, what is Edina legal predicting will be big in 2010?

Alternative financing.

As in, contracts for deed and mortgage assumptions.

Expected: Higher Interest Rates

Both are likely to be more common in the housing market in the coming year(s), for four reasons:

One. Higher interest rates. The Fed's ginormous, $1.25 trillion(!) buy-down of mortgage rates (yes, it's been happening all year) is slated to be phased out early in 2010.

Without that subsidy, rates are expected to float higher. In fact, they already are.

Contracts for deed are are a time-tested alternative to more expensive, less available bank financing.

Two. A continued weak economy.

Consumers who've lost a home to foreclosure typically can't qualify for a mortgage for at least three years.

But if they have steady income, there's no reason why they can't make payments on a contract for deed.

Three. Continued, volatile investing climate.

As investors know all too well, the interest rate on short-term savings is now effectively zero (and has been for over a year). Just because banks are expected to charge more for mortgages doesn't mean that savers can expect to earn more on their balances.

Meanwhile, many investors' appetite for stocks is, shall we say, diminished.

Contracts for deed provide an attractive alternative to home sellers with considerable equity.

And guess what?

Something like two-thirds of homeowners over 60 years old own their homes free and clear!

Four. Buyer and Sellers will assume and assign, respectively, below-market rate mortgages . . . because they can.

Fully 50% of the mortgages made in 2009 have been comprised of FHA and VA loans -- both of which are assumable.

If rates hit 7%-8% in the future, as many expect, being able to step into your seller's 4.75% interest rate is a no-brainer.

P.S.: one more way U.S. taxpayers are going to get shellacked if/when interest rates rise: all those assumable FHA and VA loans will have to be written down by the tens of billions.

Bank Foot-Dragging?

"Short" Sales: Anything But

KARE 11's Rick Kupchella hosted a nice piece on tonight's 10 p.m. news about "short sales." (No video link here because I couldn't get it to work.)

A short sale occurs when the bank(s) agree to reduce the principal that they're owed so that the owner can take an offer without writing a check for the shortfall.

Kupchella interviewed an Edina agent who reported that the average response time to hear back on short sales, in his capacity as a Buyer's Rep, was 120 days. His success rate closing short sales? Forty percent.

In other words, 60% of the time, efforts at arranging a short sale fail, and the house presumably advances to foreclosure.

(Incidentally, those statistics echo my own -- thankfully -- limited experienced; I'm representing a Buyer now who's at 110 days without a formal response to his offer).

So what do the banks say?

None would appear on camera, or respond to requests for interviews. However, one bank cited a stale press release claiming that the average response time was less than a month.

Not based on what I've seen and heard . .

According to Kupchella, the normally cooperative Federal Reserve Bank of Minneapolis would only opine that banks had an obligation to employ enough staff to expeditiously handle such sales.