This article explains the services a broker can provide to clients with negative equities in their properties.
Here are some tips for listing agents and brokers looking to market their services to owners with negative equities who either want to sell their property or get a cramdown of the loan balance and keep the property.
Listings in multiple listing services (MLSs) for moderate- to lower-priced houses (excluding those that do not qualify for FHA financing, such as jumbo loan properties) generally fall into three categories:
real estate owned (REO) properties held by lenders, which make up roughly 35% of listings;
properties whose owners have no equity and are candidates for cramdown arrangements or short sales which represent roughly 60% of listings; or
properties which have an equity and will generate net sales proceeds for the owner, the remaining 10% or less of listings.
The Troubled Assets Relief Program (TARP) and pool servicing arrangements contain compulsions which are preventing lenders from doing anything about principal cramdown arrangements or short sales discounts. Lenders operating under these conditions are unwilling to agree to a discount or radical modification of a loan to meet property values. This means the agents and brokers are going to have to adjust the services they offer as short sales are no less likely to happen than cramdown arrangements with the lender. Whichever occurs, the listing agent in on the result can earn that fee.
Under a short sale discount, the owner has to plead poverty and a desire to exit the property. Under a cramdown the owner has to plead poverty and the ability to pay, both at the same time. Lenders, of all people, are suddenly concerned about the “moral risk” they will be creating by allowing a homeowner to pay less principal than they agreed to pay during the boom times. Their fear is that the public will catch on to the game (the moral risk) and get their loans reduced to the value of the home – and if they don’t get a cramdown voluntarily, they will then choose to default and force the lender to get realistic about the principal amount they are going to get on the loan under the put option in the trust deed.
With few listings selling each month, to maximize chances of earning a fee the agent should offer services under his property listing to fulfill a dual purpose:
locating a buyer and negotiating a discount with the lender; and
commencing negotiations of a cramdown of the loan amount with the lender/servicer.
While an agent is fulfilling his traditional role of facilitating a sale of the property by marketing the property as a short sale, he can start arranging with the lender not only for the discount amount on the short sale listing price, but also for a principal cramdown. Thus, the owner keeps the property on the chance that no buyer will be found. The agent is assured a fee either way, since his employment agreement with the owner also includes a provision for a fee to be paid to him if he is successful in negotiating a cramdown.
The fee provision for a successful short sale loan discount negotiation should be included in the purchase offer – agreed to by both the seller and the buyer. A different way for a broker to do business is to use CAR forms which have the agents (read: brokers) entering into separate agreements with the seller for payment of fees. As lenders control fees based on what appears in a purchase agreement, this essentially grants control over the fee amounts to the lender in their effort to control their costs in the transaction. Lenders do cut or eliminate fees that do not appear in the purchase agreement. They have never agreed to the fees as they are not a party to any of the listings or purchase agreements. In order for the short sale discount scenario to work, the old way of doing business – and the antiquated forms that go with it – must be sent packing.
The fee for negotiating a cramdown for the owner who wishes to remain in his home with the fiscally sound future arrangement of a loan balance in line with the property’s present value should be 2 or 3% of the loan amount. Should a short sale be negotiated in the process, then the local rate should apply for the sale, which is usually around 6%. Also, the agent will need the seller’s authorization in the listing agreement to negotiate with the lender for a cramdown to keep the property or a discount on the short sale.
Further, the buyer’s offer on a short sale situation should be on a purchase agreement form which contains only those provisions needed for a short sale. The terms for payment of the price would be limited to a new loan contingency and the entire transaction would be subject to the existing lender’s acceptance of the net proceeds of the sale as full satisfaction of the seller’s loan.[See first tuesday Form 150-1]