More home sellers go short

The so-called "short sale" of a home can be a viable alternative to foreclosure and will become more prevalent as millions of adjustable-rate mortgages reset over the next 18 months, real estate industry observers say.

Short sales, an agreement that allows a home to be sold for less than the amount owed, have been around for a long time, but have come to prominence lately because of the unprecedented increase in foreclosures, said Arthur Marvin, broker for Wingate Mortgage Group in Las Vegas and class instructor on foreclosures and short sales.

He said there are 3,350 homes listed as short sales in Las Vegas, more than double the number from four months ago, and 1,450 of them are vacant. That's a good indicator that many of the short sales are investor-owned, Marvin said.

"That's a lot of homes that are short sales and every one of them is overencumbered," he said. "It's grown exponentially since last year and it's going to keep on going. Just a reminder -- there is an epidemic going on in Las Vegas and they're called foreclosures. Foreclosures are causing another epidemic called short sales."

The beneficiary, or lender, makes the final decision in approving a short sale.

While short sales are by no means a slam dunk, lenders are more willing to negotiate with borrowers today who are in default on their mortgage payments, Realtor Robin Camacho said.

"What they want upfront is a hardship letter from the seller, a contract between the buyer and seller and an estimated settlement statement," Camacho said. "They may counteroffer and you continue to negotiate. They're a lot more negotiable than they were six weeks ago."

She has five short-sale listings, including one in the Sunrise Mountain area of east Las Vegas that's in escrow for $182,000. It was purchased for $200,000 two years ago and refinanced for about $232,000. She's waiting for a response from the lender after getting a BPO, or broker's price opinion, for the home.

Camacho said she's also waiting to hear if an offer will be accepted for a short sale on a 6,600-square-foot "fixer upper" home that will probably sell for 60 percent less than a similar home across the street.

Yenory Orange, REO managing director for Green Lockett Realty, said the last thing a bank wants to do is foreclose on a home. If a bank puts the house in foreclosure, it has to clean it up, paint it, replace the carpet, list it on the market and pay a broker's commission, she said.

Realtors need to build a relationship with the bank on a short sale, Orange said; they should meet with the loan officers and provide them with as much data as possible on the house and the market.

"They're just regular people pushing files," she said. "So many banks are not prepared. They're not accustomed to short sales and that's the problem."

Marvin, who teaches classes approved by the Nevada Real Estate Division and Mortgage Lending Division, said a short sale can benefit everyone involved in the transaction.

Financially troubled homeowners save the embarrassment and marred credit associated with a foreclosure. Investors and entry-level buyers have the opportunity to buy a home below market value. Lenders avoid the hassle and expense of seizing a home and putting it up for auction.

Short sales can occur before a home goes to foreclosure or while it's in foreclosure, Marvin said.

"The premise is that both are in trouble. The difference between a foreclosure and short sale is you can be in foreclosure and not be encumbered (in debt)," he said. "A short sale has no equity."

Potential buyers need to understand a short-sale transaction before entering any purchase contract, observers say. While a buyer and seller may agree on the price, the short sale occurs at the sole discretion of the existing lender or servicing company.

"Remember, lenders are not looking to bail out borrowers who simply overextended themselves during the recent real estate boom," an article in You magazine said. "In most cases, a lender will only consider a short sale if a borrower has clearly suffered a serious financial hardship that directly caused him or her to default on the mortgage."

Short sales are a common practice within the mortgage industry and are determined on a case-by-case basis, said Patrick Carey, head of default and retention operations for Wells Fargo Home Mortgage.

Most homeowners are in default when they apply for short sale. It's an option based on the value of the property, the underlying fundamentals of what is owed and the anticipated marketing time.

The investor has predetermined guidelines for the shortage along with the minimum amount they will take in the loan sale. When the sale proceeds do not satisfy the remaining balance, the post-sale balance is forgiven. The credit is then reported as satisfied for "less than full" amount, Carey said.

"While banks still realize large losses on short sales, there are some benefits, including the elimination of foreclosure attorney fees and costs, the marketing costs should the property go to REO and any potential risk of damage or deterioration due to prolonged vacancy," he said.

The bank's denial of a short sale is not necessarily a final "no," Marvin said. Brokers can take the process further by providing the lender with a forecast loss analysis, negotiating their position that the offer may be the best and highest benefit to the lender's investor, he said.

"The lender uses software to calculate if we let it go to foreclosure, how much do we lose? If we let it go to a short sale, how much do we lose? Whatever is less, that's the one they want. These two (foreclosures and short sales) are in competition with each other," he said.

Because foreclosures take at least five months from notice of default to final eviction and trustee sale, some homeowners find it financially advantageous to remain in the home without making payments rather than sell at a loss and move somewhere else.

"That's the $64,000 question," Marvin said. "Should they live in it and let it go to foreclosure or sell in a short sale?"

The Federal Reserve has tried to bail out the financial and credit markets by recently cutting its discount rate and infusing billions of dollars into the banking system. The real estate market, however, continues to suffer. Foreclosures are nearly double from a year ago and home prices are down 5 percent to 10 percent around the country.

Inventory of homes on the market exceeds a 36-month supply in some parts of the country. The Greater Las Vegas Association of Realtors reported 24,341 homes for sale in August and sales of 1,316 single-family units, about an 18-month supply.

So far this year, 731,244 preforeclosures have been filed nationwide, Sacramento, Calif-.based Foreclosures.com reported. That translates to nearly 10 out of every 1,000 households in trouble with their mortgages.

It's a dismal picture, but one that may brighten for some homeowners thanks to changes in the Federal Housing Administration's lending practices, said Alexis McGee, president of Foreclosures.com.

Under President Bush's plan to help homeowners trapped by subprime adjustable-rate mortgages, roughly 80,000 borrowers will be able to refinance into better and more affordable FHA-backed loans.

A record $50 billion in adjustable-rate mortgages are poised to reset to higher rates this fall, according to Credit Suisse Group. The number of borrowers whose mortgage payments jump in October, November and December will be the second-highest ever for a quarter.

Bush also wants to raise the maximum FHA loan limit of $362,000 to include those disconnected from eligibility in the current market, especially in coastal areas. That will allow homeowners a chance at FHA loans in markets previously all but priced out, McGee said.

"But new bailouts and proposals aside, just how bad are things likely to get before they start improving? That depends on what day it is and what reports come from what experts," she said.

The Fed's Beige Book, which describes economic conditions around the country, points to the fact that while upheaval in the financial markets has made the housing slump worse, the overall economy hasn't been widely harmed, McGee added.

"As far as short sales, those will continue to grow as folks with little or no equity realize they can't hold on," she said. "The problem is, most banks are not really discounting for investors yet on these properties. We need 30 percent and more off the house to make the numbers work to buy, fix and sell. Their 10 (percent) to 15 percent off is simply not enough for investors, but may work for home buyers interested in a small deal."

In his column, "Eye on the Economy," National Association of Home Builders Chief Economist David Seiders said continued growth in the nation's economy is the best guarantee of a revival in demand for new and existing homes.

Beset by mortgage market woes, eroding house values in a growing number of areas and "a hefty shove from the media," housing is continuing to lose momentum, Seiders said.

"But these negatives do not mean that housing will continue downward forever," he said. "As long as the overall economy continues to expand, with the Fed's help, throwing off decent growth in employment and household income, ongoing population growth will generate decent growth in the number of households and that's the key."

Despite the current mortgage credit crunch, which is most pronounced in subprime borrowing, Seiders noted that there remains significant favorable financial support for prospective home buyers, particularly in the FHA and VA and prime conventional conforming mortgage markets.

With the greatest implications for home buyers in high-priced housing markets in California and along the East Coast, Seiders added that the jumbo mortgage market should "regain its footing before long" following its rapid deterioration in August.

Over the past couple of years, Las Vegas has gone from being the nation's hottest real estate market to one of the toughest, said Stan Kates of Toronto-based Kates Marketing Group. He's been involved in the Manhattan, Las Vegas Central and Desert Shadows condo projects.

"Today, developers, builders and real estate sales professionals in Las Vegas are dealing with massive numbers of foreclosures, stability issues of projects that fail to reach fruition, a market crowded with new and resale homes, tough financing requirements and a bloodbath due to developers desperately slashing prices to move inventory," he said.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or (702) 383-0491.