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Will Short Sales Turn the Market Around?

By Mark Karten on Janury 10, 2010

Is it just me, or is January almost over? The stores are full of Valentine's cards and candy; they're even selling Easter eggs now. Our calendars seem to be run by retailers and how much money we'll spend on the next holiday.

In real estate, the first weeks of January bring us all the year-end statistics, which I'm sharing with you later in this report. Similar to the way the stores manipulate us, so does the media.

I've talked about this before and the headlines always entertain me. On January 5th, a local news station ran a story that housing sales dropped 16% from October to November, 2009 according to the National Association of Realtors. Strangely, the report was released 1 1/2 months earlier on November 18th. Why the delay? Bad news sells and people talk about it more than good news.

In Las Vegas, however, we set a new record high for sales. According to GLVAR (Greater Las Vegas Association of Realtors), 46,879 homes were sold in 2009. That's almost double the homes sold in 2008, and just behind 2004 (the year of the housing boom), when 71,963 homes were sold.

So the truth is the market is extremely hot in Las Vegas, prices are low and getting a winning offer is far from easy. In 2009, 60% of all homes sold in Las Vegas were bank-owned. The median price of homes dropped 22.3% from 2008 to $136,000. Condo prices dropped even further, 27.4% to $65,300. What does this mean to buyers? You can't lose, if you can get your offer accepted. Are the prices going to continue to drop? For 2010, I'm going to say yes, but not across the board.

For almost a year, the buzz in the industry has been our "shadow inventory." These are homes that the bank has foreclosed on, but not released for sale. Supposedly the number in Las Vegas can be as high as 12,000 - which would devastate pricing if they were to be released all at once. Industry newsletters tell us that we're due to see these any time, and yet nothing has materialized yet. I liken the hype to Y2K. Remember that? When all the computers were going to crash on the turn of the century from 1999 to 2000? Never happened, but it had a lot of people worried for almost six months.

Last month, I briefly mentioned a new program called HAFA. This may be the game-changer for housing in 2010. I've written about short sales a few times in 2009 and how difficult they are for buyers and sellers. Statistically, the number of short sale listings grow higher and higher each week, while their chances of success remain dismally low (12% on average.)

HAFA (Home Affordable Foreclosure Alternatives Program) has a simple goal. For borrowers who qualify under HAMP (a loan modification program that sets loan ratio guidelines) but can't keep their home, HAFA changes the rules of short sales and takes out all the pitfalls of the process.

Currently, buying a short sale requires a lot of patience and dealing with uncertainty. For instance, a home is priced at $70,000. You give a full price offer and the homeowner accepts. Because they owe $155,000 on their mortgage, the bank has to approve the sale and agree to forgive the balance of $85,000 due them.

Along the way, a number of things may happen. The bank will have the house appraised and may find it's really worth $82,000. They won't accept the $70,000 but will counter at the higher amount. They may agree to the sale, but ask the homeowner to pay back a portion of the loss, by carrying a promissory note for 10-20 years in the future, which the homeowner may be unable to afford. They could also file a deficiency judgment, which allows them to come after the homeowner for 6 years after the foreclosure to recoup their loss. The worst part is that this whole process can take anywhere from 4 weeks to 6 months or longer for approval.

HAFA changes everything. The program officially begins on April 5th and the rules are simple. The borrower must meet the basic eligibility criteria for HAMP, which are: It must be your principal residence. Your first mortgage has to have originated before 2009. Mortgage delinquent or default is reasonably foreseeable. Unpaid principal balance no more than $729,750 (higher limits for 2 to 4 unit dwellings). Borrower's total monthly payment exceeds 31% of gross income.

Having those qualifications are huge because there have never been agreed-upon guidelines before. It gets even better. Under HAFA, there will be uniform paperwork and timeframes.

Here are some of the highlights:

-- The bank can pre-approve the property before it's listed and tell the Realtor and borrower the minimum acceptable net proceeds, which helps us solicit and accept viable offers.

-- Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).

-- The Short Sale Agreement must give the borrower an initial period of 120 days to sell the house (extensions permitted up to a total of 12 months).

-- Within 10 business days after the lender receives a short sale purchase agreement and all required attachments, they must approve or deny the request and advise the borrower. This is an incredible advantage for buyers and will change totally change the perception of short sale listings.

-- The lender may require the closing to take place within a reasonable period after it approves the offer, but not sooner than 45 days from the date of the sales contract unless the borrower agrees.

-- The lender must release its first mortgage lien within 10 business days (or earlier if required by state or local law) after receipt of sale proceeds from a short sale or delivery of the deed in the case of a deed-in-lieu. The investor must waive rights to seek deficiency judgment and may not require a promissory note for any deficiency. There are many more details within the HAFA program. In fact, the guidelines consist of 43 pages of instructions. The bad news is that lenders are not required to participate in this program, but the majority of the big lenders are all on board. This includes Bank of America, Chase, Wells Fargo, CitiBank, AHMS, OneWest and GMAC plus many smaller lenders.

What does this mean to you? If you're a homeowner in trouble, help is on the way. There are more details than what I've outlined, but it's important to contact a Realtor trained in short sales to help you understand the process and what your options are.

If you're a buyer, your dream home may be closer than you think. Because the first-time home buyer credit requires you be under contract by April 30th, the next few months are going to be a madhouse of offers and sales. The key is to start shopping now.

To wrap this up, when HAFA is fully implemented, this may be the key to quickly diminish any fears of a shadow inventory and help both buyers and sellers move forward with their goals.

We're short-sale specialists, so if you have any specific questions I can answer for you, please don't hesitate to contact me directly!

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