Part II of this shortsale article series examines the pedigree of a true “shortsale specialist” and highlights the many tedious aspects of short sale training, the shortcomings of common short sale courses and the process of qualifying a negative-equity homeowner for a shortsale with his mortgage lender’s loss mitigation officer.

The new and present normal, sort of

The shortsale has resurfaced to again become a commonplace feature of the home resale market in the wake of the Lesser Depression brought on by the dire job environment. Hundreds of thousands of California homeowners have no sufficient financial means to keep paying on the mortgages encumbering their negative-equity properties, a requisite condition for a lender’s consent to a short payoff.

Roughly one in six multiple listing service (MLS) sales transactions statewide today is a shortsale ― the result of the financial fallout of the massively inflated real estate prices of the past decade and the current lack of job opportunities for unemployed or underemployed homeowners. [For more information regarding the California jobs market, see the August 2011 first tuesday article, Jobs move real estate.]

Homeowners looking to enter into and close a sale based on a short payoff of the mortgage must:

  • be delinquent on their mortgage payments;
  • owe more than their property is worth, the negative-equity condition; and
  • no longer qualify to pay on the mortgage based on assets and debt-to-income (DTI) ratios.

These unemployed and underemployed casualties of our ongoing Lesser Depression often view a short payoff as the respectable alternative to losing their home through a foreclosure sale. To accomplish their shortsale objective, they fully expect even an inexperienced agent with “shortsale training” seminars under his belt to properly structure the listing and purchase offers, as well as successfully negotiate with the lender to get rid of both the house and the mortgage debt.

However, agents confronted with a potential listing of a negative equity property find that lenders prefer foreclosures over short payoffs since foreclosures:

  • delay the reporting of their loan losses (which short payoffs do not);
  • avoid discounting loans on payoff in situations where the seller is fully qualified to make payments or the property value is deemed greater than the price the seller has agreed to accept; and
  • quell their fears that homeowners are taking advantage of them (thus creating a moral risk) by receiving an unwarranted discount. [For more information regarding foreclosures v. shortsales, see the October 2010 first tuesday article, Lenders prefer foreclosures, not short sales.]

For these reasons, negotiating with a lender for a short payoff is not a straight-forward or routine task. Any agent facilitating a shortsale by handling negotiations with the homeowner’s lender needs to first thoroughly understand:

  • California anti-deficiency law barring lender collection of property value deficiencies on purchase-assist mortgage foreclosures and short payoffs [See first tuesday Real Estate Finance Chapter 43: Anti-deficiency: past, present and future and the August 2011 first tuesday Legislative Watch, Antideficiency protection extended to second trust deed discounts.];
  • the trust deed foreclosure process and documentation, as well as time periods for reinstatement and redemption prior to the trustee’s sale and elimination of ownership [see first tuesday Real Estate Finance Chapter 47: Trustee’s foreclosure procedures];
  • complications over clearing the title of any junior financing encumbering the property in situations where the amount of the first is either less or more than the shortsale net proceeds;
  • pricing in a shortsale purchase agreement must be at or above the fair market value (FMV) of the property as set by the lender’s appraiser;
  • the Home Affordable Foreclosure Alternatives (HAFA) application process if the homeowner is eligible to receive government-funded relocation funds;
  • lender documentation to confirm the homeowner is qualified for a discount (unqualified to pay) before they will consent to a short payoff; and
  • their homeowner’s income and net worth financial situation.

This knowledge combined with recent first-hand experience acquired acting as a seller’s agent and actually negotiating short payoffs with a lender is the pedigree of a “shortsale specialist.”

Before you take a listing, do the math

Only 19% of shortsales homeowners enter into with buyers in Southern California actually close. Agents who struggle to get listings and earn fees are tempted to take any shortsale listing that comes across their desk. However, a short payoff listing becomes a massive waste of time, effort and goodwill if the lender is not going to consent to a discount.

Only 19% of shortsales in Southern California actually close.

The lender’s consent is based on facts readily available to the seller’s agent at the time the listing is being negotiated. Thus, an agent’s forward-oriented investigation can anticipate lender approval or rejection before taking the listing and conserve the agent’s time, talent, reputation and money. For agents, a basic litmus test to discern which shortsale listings are worth the time begins by asking the following questions:

Is the mortgage’s LTV ratio more or less than 94%?

If a homeowner owes less than the home is worth (read: the loan-to-value ratio (LTV) is less than 94%), the lender will not agree to a short payoff – the net sales proceeds are more than enough to pay the loan in full (but they may permit a few thousand dollars be paid to a second trust deed holder for his reconveyance).

How many liens are on the property?

The seller’s agent needs to determine whether any junior liens encumber the property since each lender must be dealt with to clear title of their trust deed lien before a shortsale can be closed.

Occasionally, the same lender holds both the first and second mortgage on a home, the piggy-back financing of the Millennium Boom. Holding all the liens on the property, the lender will handle negotiations as though one amount was owed them. If they qualify the homeowner for a shortsale, the lender receives the net sales proceeds from a further-approved shortsale in full settlement of the combined debts.

However, if a lender other than the first trust deed lender holds the second mortgage, one of two situations exists:

  • the net sales proceeds satisfy the first trust deed, but not the second; or
  • the net sales proceeds do not satisfy the first trust deed, and by extension do not satisfy the second.

In the first fact situation, the net sales proceeds are more than sufficient to fully satisfy the first trust deed on closing. In this situation, the seller’s agent negotiates solely with the junior trust deed holder(s) ― seeking their consent to accept the balance of the net proceeds remaining (after paying the first trust deed lender, who has priority to the funds) as the short payoff and satisfaction in exchange for a reconveyance of their trust deed.

Here, the second lender ― not the first ― is initially contacted when taking the listing to qualify the seller for a short payoff of the second. If the second concludes the seller qualifies for a discounted payoff, then the purchase agreement entered into by the seller is submitted to the second lender for shortpay consent (together with a HUD-1 estimated closing statement).

At that point, the second lender orders out the appraisal, determines the property value and reviews the appropriateness of the net sales proceeds before allowing the shortsale to close by discounting the amount owed them.

The second fact situation is traumatic for everyone involved in clearing title: the homeowner, the seller’s agent and both lenders. Here, the seller’s agent has to deal with both lenders. The second trust deed lender will demand some amount of money from the net sales proceeds before they will consent to cancel their debt and reconvey their trust deed lien.

As a result, the seller’s agent will need to be sufficiently innovative to set the stage at the outset of negotiations. To begin, the first must understand the second must be dealt with if the first is to be paid off by a shortsale.  Thus, the first must agree to let the second participate for a few thousand dollars in the net sales proceeds, which firsts have learned to understand.

Then negotiations with the second lender must keep the second from being so greedy (they have nothing to lose) as to kill the transaction.  At all times agents need to resist any requests by the lenders for the brokers to cut their fees agreed to in the purchase agreement. [See first tuesday Form 150-1]

Keep an eye on your buyer

The processing times on the lenders’ end vary widely. The typical shortsale takes three to five months, but any one of many factors involved can deny the seller’s agent success.

On the other end of the deal, the length and uncertainty of a short payoff transaction often triggers a buyer’s decision to withdraw their offer or just abandon it as hopeless. Buyers and buyer’s agents are too often left “out of the loop” during the shortsale process. To keep the deal alive, buyers must be given frequent updates to ensure the process is on the right track and moving. Although buyer’s agents have no contact with the loss mitigation specialist during the shortsale process, they must stay in contact with the seller’s agent, say weekly, for status updates to be passed on to the buyer.

Frustrated buyers and those who locate and purchase other property cancel or abandon their purchase agreements during the approval process. Loss of the buyer nullifies all the work done by the lender.  On the seller’s acceptance of another buyer’s purchase offer and submission of documentation to the lender for approval, the loss mitigation specialist assigned to the file starts the approval and appraisal process all over again (as does HAFA).

Further delay for HAFA benefits

The shortsale process is often delayed by yet another monkey wrench – HAFA money for the seller. The government’s HAFA program is aimed at helping homeowners avoid foreclosure.  It is a supplement to the Home Affordable Modification Program (HAMP) rolled out in spring of 2009. [For more information regarding HAMP, see the June 2011 first tuesday article, More bad news for HAMP.]

HAFA provides incentives for homeowners, lenders and agents to consider a shortsale rather than a foreclosure sale. Homeowners participating in a HAFA shortsale receive:

  • $3,000 to help cover their cost of relocation;
  • full release from future deficiency liability for the first mortgage (as cash contributions are not allowed in a HAFA transaction); and
  • standard timeframes for each step of the process.

Lenders participating in a HAFA shortsale receive:

  • $1,500 to cover administrative costs; and
  • up to $2,000 for allowing a total of $6,000 in net sales proceeds to be distributed to junior lienholders.

Agents representing a homeowner in a HAFA shortsale receive fee protection since lenders are prohibited from requiring a reduction in a real estate fee agreed upon in the listing agreement (up to 6%).

In order for a homeowner to be eligible for HAFA:

  • the property must be the homeowner’s principal residence;
  • the mortgage must be a first lien originated before January 1, 2009;
  • the mortgage must be delinquent or default must be imminent;
  • the current unpaid principal balance must be equal to or less than $729,750;
  • the homeowner’s total monthly mortgage payment must exceed 31% of his gross income; and
  • the homeowner must first apply for a loan modification through HAMP.

Lenders must consider a HAMP homeowner for HAFA within 30 calendar days after the homeowner:

  • fails to successfully complete a trial period under a HAMP modification;
  • misses at least two consecutive payments after a HAMP modification; or
  • requests a shortsale or deed-in-lieu of foreclosure.

If a homeowner requests shortsale consent from their lender after all HAFA qualifications have been met, their lender sends them a HAFA Short Sale Agreement (SSA) to be signed by the homeowner and real estate agent within 14 calendar days of receipt. The SSA is then returned to the lender’s loss mitigation specialist. [HAFA Form 184]

The lender gives the homeowner an initial period of 120 calendar days to sell their home after receipt of the signed SSA, which can be extended up to 12 months (during which time period the owner is making no payments as the owner pays no rent). Once an offer to purchase the home is accepted, the homeowner (or his agent) must submit a Request for Approval of Short Sale (RASS) to the lender within three business days after executing a purchase agreement, including:

  • a copy of the purchase agreement and all addenda;
  • buyer documentation of funds or pre-approval from a lender; and
  • information on the status of subordinate liens and any negotiations with subordinate lienholders. [HAFA Form 185]

After receiving the RASS, the lender approves or denies the request within ten business days.

This separate HAFA application, documentation and processing time is completed before the lender even begins its own shortsale approval process, creating a delay of around three months. If the lender refuses to approve the transaction for a short payoff after HAFA approves the owner for a shortsale, the transaction with the buyer is terminated unless somehow revived by negotiations to resolve the lender’s reasons for disapproval of the shortsale. If the sale is terminated, the HAFA process starts all over again for this seller (and the seller’s agent) when the next buyer’s shortsale purchase offer is accepted. [For more information regarding HAFA, see the April 2011 first tuesday article, Government mortgage modification programs provide no remedy.]

Please, what’s in a designation?

Various real estate trade unions (and schools) offer their members certification programs, granting paid participants official designations as “Short Sale and Foreclosure (SFR) Certified” or as a “HAFA Specialist.” These brief in-class or online seminars give attendees basic instructions about how to complete shortsale paperwork and what government programs are available to struggling homeowners. However, they do not require any field work or experience handling an actual shortsale, the nitty-gritty that makes or breaks these deals.

Armed with official logos and impressive titles, California real estate licensees are clambering to brand themselves as “shortsale specialists” in hopes of generating business from a perceived influx of shortsale opportunities. The escalating demand for shortsale arrangements by tens of thousands of owners needing to dispose of their homes has emboldened many agents to distinguish themselves from the competition by obtaining special certifications as credentials. Essentially they are making a representation to sellers they have the skills necessary to negotiate and close a shortsale.

To become “SFR Certified” under a typical trade union program, an agent is required to:

  • be a member of the trade union;
  • attend one live class for one day;
  • watch two to three one-hour webinars; and
  • pay about $175.

The courses usually overview:

  • the impact of foreclosure on a community;
  • options for distressed homeowners;
  • the anatomy of a shortsale;
  • the components of a shortsale package;
  • listing real estate owned (REO) properties; and
  • how to find shortsale listings.

To become a “HAFA Specialist,” an agent is required to:

  • watch three or four one-hour video modules;
  • pass a written exam; and
  • pay about $159.

These HAFA instruction courses generally cover:

  • who is affected by HAFA;
  • how HAFA works in connection to HAMP;
  • what differentiates a HAFA transaction from a non-HAFA transaction; and
  • an agent’s responsibilities under HAFA.

As the gatekeepers of real estate, we must ask if it is misleading to call one a “specialist” if they have merely watched a “how-to” video or passed a written exam. The real aptitude of a specialist is reflected in how many shortsales they have closed.

If a homeowner solicits the employment of an “SFR Certified” agent, is it too far-fetched to assume that agent has experience actually negotiating and closing a shortsale as the seller’s agent?

Is it too far-fetched to assume an “SFR Certified” agent has experience actually closing a shortsale?

As of now, no known certification program requires any such experience. These seminars provide a foundation of knowledge and current market trends, but fall short of equipping agents and brokers with the skills and experience to actually manage the vagaries of a shortsale beyond writing up the offer when acting as the seller’s agent or the buyer’s agent.

Due to experience, special training or education in a particular type of transaction, agents may find their opinion is given extra weight by a principal. An agent’s special qualifications suddenly become reasonable justification for the principal to rely on their opinion as an assurance that the predicted event, activity or condition will actually be experienced as stated. This is of course what real estate teams in transactions are all about – gaining experience sufficient to not harm clients and other agents.

When an agent holds himself out to be specially qualified and informed in the subject matter expressed in an opinion regarding future expectations, his opinions on the subject become positive statements of truth on which a buyer or seller of lesser knowledge can rely. [Cohen v. S&S Construction Co. (1983) 151 CA3d 941]

An agent with no actual experience, independently or as part of a team, who improperly labels himself as a specialist is risking his reputation and his fee. The general assumption made by a layman homeowner is that a “shortsale specialist” is a person who has devoted himself to the study and mastery of the shortsale, thus qualifying that specialist’s opinion regarding aspects and consequences of a shortsale as true and reliable. As an agent, if you heed that expectation you cannot later give a homeowner any reason to believe you are not — and if you do they can avoid payment of your fee.