I've said this before: For many homeowners in California, their mortgaged house is the only thing they have to show for that high paying job that vanished/downsized years ago, and now it's crunch time for many of them.
sacbee.com. Pinched homeowners turn to 'short sales' Tactic involves getting lender to accept less than you owe By Jim Wasserman -- Bee Staff Writer Published 12:01 am PDT Sunday, August 27, 2006 http://www.sacbee.com/content/business/story/14308557p-15198889c.html Sam Webber had it all during the real estate boom. The former accountant bought old houses, fixed them up and resold them for more than he paid. It was a good independent living until four months ago when the bottom fell out of his game. Now as home prices have declined 5 percent from last year in Sacramento County, Webber is what analysts call "upside down." He owes banks more than his two remaining fixer-uppers are worth. He's missed mortgage payments on each. Worse, he's tied up his entire savings and previous profits in remodeling the houses. Webber has one last hope to avoid foreclosure -- selling the houses for what he can get and persuading his bankers to accept less than he owes. "The house in North Sacramento, I'm $305,000 into the bank, and it's worth $280,000. I'm trying to get the bank to agree to $280,000," he said. Webber says he has a buyer at that price. If the bank agrees, it would avoid not only the lost time and legal expense of foreclosure but also the financial risk of resale in a depreciating market. Known in the real estate trade as a "short sale," this desperate, but practical tactic -- negotiating less than a complete payoff to lenders -- reappears like clockwork when real estate markets sour. Widespread in Texas during the 1980s oil and real estate crash and again in the 1990s as California lost thousands of jobs to military base closings, short sales are back and proliferating, say local specialists who handled them in the 1990s. Elk Grove real estate agent Derek Kirk recently counted 264 short-sale listings in El Dorado, Placer and Sacramento counties compared with fewer than 50 six months ago. Lenders, too, are noticing. "Short sales are on the rise because foreclosures are. They go hand in hand," said Cari Kerns, spokeswoman for Calabasas-based Countrywide Financial Corp., a leading national home lender. Although mortgage bankers and federal agencies offer few statistics on the phenomenon, its re-emergence shows how hard, fast rules that normally govern the real estate game can become flexible as buyers and lenders alike teeter on the edge of declining home values. Agents say many banks are being stern and even resistant as they gauge the depth of the slowdown. But most believe short sales will increasingly become a safety valve for sellers -- and source of better deals for some buyers -- as more investors or homeowners end up in Webber's shoes. "I made a decision to do this as my livelihood," Webber said recently as he begins a job search at age 47. "All my income was coming from the houses. This time it's burned me. I've tapped out every dime I have." To make his case with the banks, Webber has retained real estate broker Sterling Watkins, who helped negotiate hundreds of short sales with lenders during Sacramento's 1990s real estate bust. Watkins recently founded a new company, Short Sales Services, to pick up where he left off in 1997. That's when short sales abruptly vanished as the real estate market again began appreciating. "This is coming around again," he said days ago at a Roseville short-sales seminar. "It's not a fun thing to do, but sometimes it's necessary." Across the region, say 1990s-era short sale veterans, homeowners are facing serious financial setbacks from illnesses, divorce, job loss, and car or home repairs. But this time many also have risky financing because they borrowed to the very edge of their ability and took out home equity loans. In Watkin's words, they have an "albatross that's dragging them under" at the same time their home values are falling. It's little wonder many are stressed. Last year up to 77 percent of capital-area homebuyers used riskier adjustable-rate financing to help them buy homes they couldn't otherwise have afforded. Many are falling behind on mortgage payments. In April, May and June, Sacramento, Sutter and Placer counties showed some of California's biggest increases in missed mortgage payments, according to La Jolla-based researcher DataQuick Information Systems. Likewise, Irvine-based RealtyTrac Inc., which tracks foreclosures, shows 962 properties currently owned by banks in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties. Though all the options for short-sale candidates may be bad, short sales "beat the heck out of foreclosure," Watkins told his seminar attendees, some of them in trouble. Short sales cause less damage to credit scores, raise fewer legal issues and hold less stigma than losing the house to the bank, he said. Banks, meanwhile, can cut their losses. Bankers sometimes decide "it's better to cut a deal up front and mitigate my loss in the situation," explained financial economist Jay Brinkmann of the Mortgage Bankers Association in Washington, D.C. "The real cost in a foreclosure action is what it costs the lender to carry that loan until such time as they can resell the house, Brinkmann said. "We have interest costs we have to pay, and who is going to pay the taxes? The same thing with insurance. Do you have to start covering the insurance? And finally, there's maintenance and repair costs." For all that, it's hardly easy for the homeowner. Short sales can actually make a house harder to sell. Many real estate agents steer would-be buyers from such deals, which involve complications, longer time-frames and whims of faraway banks. Some agents who specialize in short sales for sellers won't take their buyer clients to them. "If I have a willing and able buyer, I'm not going to take them into a short sale," said real estate agent Scott Williams, a leading 1990s short-sale specialist. The process also requires the homeowners to prove they can't make their mortgage payments. That means being conclusively broke. "Unless you have a strong, legitimate hardship and present a package that details that, they're (banks) not going to do it," said Elk Grove's Kirk, who negotiated hundreds of short sales in the 1990s as both a banker and real estate agent. Finally, the debt that is erased by a short sale is often treated as extra income by the Internal Revenue Service. That can come as a surprise. "They often don't tell people that in a short sale," said Robert Turrietta, loan consultant at Sacramento-based Vitek Mortgage. "You have to pay taxes." With troubled homeowners and banks increasingly sorting out their options, an abundance of seminars, compact discs, books and Web-based advertising have now begun to tout short sales as a route to investor wealth. "The Real Estate Preforeclosure Investing Profit Bonanza!" one Web site calls them. Williams calls the pitches "baloney." Kirk, too, said, "Short sales, probably 90 percent of the time, are not good investor deals. The reason is because the banks are going to do their own valuation on the property. They will do their own appraisal and determine what they feel is realistic value." That hasn't stopped investors from making low-ball offers on homes identified as short sale candidates. "I think that's why lenders are digging in their heels," Williams said. Williams expects the game is just getting started. Recalling the 1990s, he said: "Twenty percent of the homes in Sacramento then were short sales. We had a five-year downturn. Prices dropped 25 to 30 percent, and a whole lot of people had no equity." WHAT'S INVOLVED IN THIS PROCESS Why accept a short sale? To cut their losses, lenders sometimes accept less for a property than the loan value. It may be cheaper and easier than foreclosing and returning the property to market -- especially if home prices are dropping. How does it work? Real estate agents determine the house is worth less than the amount owed and advertise it as a short sale. The owner provides detailed financial information to document genuine hardship and inability to repay the full loan. The agent or short-sale expert negotiates with the lender to accept less than the loan value. What are the advantages? The owner can avoid bankruptcy. It is less damaging than foreclosure to a credit rating. How does it affect the owner's credit? A short sale doesn't directly damage a credit score if the bank accepts the offer and doesn't report negative credit behavior. Typically, any payments missed leading up to a short sale remain on a credit report for seven years. Lenders factor that into decisions to issue new loans. Foreclosures also remain on credit scores for seven years, making it more difficult to get standard financing. Borrowers may have to pay higher interest rates. The impact on credit scores diminishes over time. What are the drawbacks? The Internal Revenue Service may treat vanished debt as taxable income. The process is complicated and time-consuming, and it makes it harder to attract potential buyers to the home. Why would anyone do this? Declining real estate values often aggravate already onerous financial situations. An individual may be facing divorce, job loss, a sudden drop in income, or the inability to meet rising payments of adjustable-rate mortgages. What were previous short-sale cycles? Texas and other oil-crash states in the 1980s. California in the 1990s after military base closings and recession. What are the alternatives? Foreclosure, bankruptcy, finding another person to assume the loan, applying to a lender for a new repayment schedule to catch up over time. Sources: About.com, Fair Isaac Corp., TransUnion's TrueCredit.com, short sale experts Derek Kirk and Sterling Watkins About the writer: * The Bee's Jim Wasserman can be reached at (916) 321-1102 or [EMAIL PROTECTED]
