“The Shortest Path To Foreclosure Relief”

“The Shortest Path To Foreclosure Relief”

By: Peter P. Casey, GRI, CRB, RECS
Prudential Wilmot Whitney Real Estate


Some time ago, probably three or four years now, my colleagues and I began to notice an increasing trend toward what we saw as risky mortgages; risky for lenders and borrowers alike.

Interest rates were in the low to mid 5% range, money was easily available and many borrowers were encouraged to choose variable rate, interest only loans. It allowed them to buy larger homes, make lower monthly payments or both or refinance, using available equity to generate cash. Such loans, possibly appropriate for a few financially strong short-term borrowers, are almost always ill advised for others. Rate increases of just two or three points could, and in many cases did, force far too many borrowers into default.

In addition, substantial political pressure was brought against lenders to lower mortgage qualification standards for unqualified buyers. While lowered standards increased homeownership opportunities, it left those borrowers vulnerable to default. In either case, default rates substantially higher than normal, not surprisingly, have been the result.

As most of these loans were sold to Fannie and Freddie and later packaged as securities by Wall Street, the crisis partially caused by unwise and overly aggressive mortgage lending has escalated far beyond housing. It was never supposed to get this far, however. “Short sales” were one solution expected to prevent a rash of foreclosures. Yes, there would be losses but those losses would be substantially lower than losses resulting from a lengthy foreclosure process. But have short sales, a “foreclosure mitigation tool” if you like, worked?
A short sale, for clarity, is a sale that occurs when the sale price of a property is not sufficient to pay the total of all mortgages, liens and costs of a sale and when a seller cannot bring sufficient liquid assets to the closing to cure all deficiencies. It can also occur when a borrower is in arrears or headed for foreclosure or when the value of a property has fallen below the outstanding balance of the mortgage.

Short sales, by design, should prevent foreclosures. They would relieve borrowers of obligations they are no longer able to fully satisfy and preserve some modest credit worthiness while, at the same time, would reduce losses suffered by lenders. On average, the Towers Group estimated in a 2002 study, foreclosures result in costs of $58,759 and take eighteen months to complete. Short sale properties sell faster, attract higher prices and reduce costs and time delays associated with foreclosures.

When successful, short sales help stabilize housing prices by avoiding typically lower foreclosure sales prices. Neighbors are less affected by falling values in the neighborhood and the communities tax base remains relatively stable.

Unfortunately, Realtors® are experiencing roadblocks to their attempts to assist with short sales primarily with lender response times. It is not unusual to wait months for a response to an offer or to have a lender reverse its acceptance of an offer at the last minute. The process has so frustrated buyers that they approach short sales with great caution or avoid them in favor of other properties.

Short staffs, inexperienced lenders’ officials and artificially inflated appraisals resulting from a failure to properly calculate the effect of neighborhood foreclosures on property values are part of the problem. Approvals from second mortgage holders and others with financial interests in the transaction have also contributed to the problems. Short sales are clearly not working as expected but, if the problems can be resolved, short sales could continue to represent part of the solution.

On September 17th, Congressman Barney Frank, Chairman of the House Financial Services Committee, having heard Realtor® concerns, quickly convened a hearing to look into this and related issues. I sincerely hope the Committee, working with mortgage lenders, manages to find ways to improve the success rate for short sales. At risk homeowners and lenders should both benefit from the discussion and taxpayers might come out of this crisis with limited damage.

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