Consider a short sale with great care

From the President

www.ygaor.com

(Updated: Thursday, November 06, 2008, 1:05 PM)

Increasingly, lenders are making loans in amounts that become too difficult for borrowers to repay. Some of these borrowers may not be able to fulfill their mortgage obligations. When a borrower is no longer in a position to make the mortgage payments, is facing foreclosure and the current market value of the property -- including escrow costs -- is less than the loan on the property, the borrower may consider a short sale.

This could save the lender the expenses of foreclosure proceedings and from having another REO (real estate owned) property on its books. From the borrower's perspective, the short sale prevents having the foreclosure on the borrower's credit history, and releases the borrower from an obligation that he or she can no longer afford.

In essence, a short sale is a sale transaction subject to a lender's approval in which the lender consents to a sale of the security interest for less than what is owed on the note and accepts the proceeds in full satisfaction of the loan amount.

A short sale requires much paperwork and preparation on behalf of the borrower. Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender. The buyer of the property must also be prepared for a protracted time period to conclude the purchase of the property.

Lender's options upon borrower's loan default

Question: What options does a lender have on a debt secured by California real property if the borrower does not make the payments on the loan?

Answer: A lender may foreclose on the defaulting borrower's real property which secures the loan. There are two types of "foreclosures" available to a lender: a trustee's sale and a judicial foreclosure.

Q: What other options may the lender consider instead of foreclosure when the borrower is delinquent?

A: Depending on the situation, a lender may consider one of the following:

Loan workout: Basically, a loan workout is any resolution of a problem loan between the lender and borrower that modifies the original loan agreement.

Deed in lieu of foreclosure: After the borrower is in default, the borrower voluntarily delivers title to the lender for consideration and the lender accepts the conveyance of the property in full satisfaction of the mortgage debt. Using this method, the lender saves the costs of foreclosure and the borrower avoids having a notice of default on his/her records.

Short sale: A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan.

A lender may accept a short sale when the borrower is in severe financial straits and market conditions make a short sale the best choice to mitigate the lender's damages. Like a deed in lieu of foreclosure, this saves the lender the costs of foreclosure and the borrower avoids having a foreclosure on his or her credit report.

Q: Why would a lender agree to accept a short sale?

A: Lenders may have ample incentive to negotiate a short sale with a distressed borrower. For example, should the lender take back a property pursuant to a foreclosure sale, the lender would become responsible for a variety of costs, including property maintenance, utilities, homeowner association fees, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.

A lender will typically evaluate the financial situation of the borrower as well as current market conditions to determine whether or not to agree to a short sale. It is really a business decision for the lender to determine whether it would receive more money by accepting the short sale or completing a foreclosure, reselling the property, and pursuing personal liability (i.e., deficiency judgment against the borrower and/or claims against guarantors, for loans on which those remedies are available.)

Q: Are there any tax effects of a short sale?

A: Yes. The tax implications for the borrower could be so significant that a short sale would not be in the borrower's best interest. Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax adviser.

(All information provided by C.A.R.)

The information above contains some basic questions and answers for potentially distressed homeowners/borrowers. This is not a complete guide, and there are many options and ramifications to consider. Consult the appropriate professionals so that you have the background to make an informed decision.

Melanie Barker, 2008 president, Yosemite Gateway Association of Realtors. Melanie@sellingthesierras.com