'Short sales' a foreclosure alternative, but process can be difficultby Curtis Gilbert, Minnesota Public Radio
With Twin Cities housing prices down dramatically from their peak three years ago, increasing numbers of homeowners are turning to so-called "short sales" as an alternative to foreclosure.
A short sale is when you sell your house for less than you owe on your mortgage. Short sales are better for a homeowner's credit rating than a foreclosure. And they can be better for a bank's balance sheet, too. But that doesn't mean the process is quick or easy. In fact, short sales take a long time.
St. Paul, Minn. — Alfred Iyobhebhe owns a house in Brooklyn Park, but he lives with his wife and son in a small two-bedroom apartment in Bloomington.
Iyobhebhe is originally from Nigeria. He came to the U.S. in 2004, and two years later, he decided to buy a house.
"Quite a few people that I spoke to then said that it's one of the best investments, that you could buy a house, and with time it would appreciate," Iyobhebhe said.
He bought the place in Brooklyn Park for $230,000. He had no down payment, just a pair of adjustable-rate mortgages. And in November of last year, the rate shot up.
"They raised the prices from 8 percent to 11 percent, something we can't just afford," Iyobhebhe said.
That jacked up his mortgage payment by about $400 a month. He tried to refinance, but the lender refused, citing the home's declining value.
Iyobhebhe could have let the bank foreclose, but instead he is trying for a short sale. He will sell the house for less than he owes the bank and will ask the bank to forgive the rest of the mortgage.
Iyobhebhe hopes to finalize the deal in the next two weeks. The best offer he got was $139,000, which means the bank will lose about $90,000. But foreclosing probably would have cost even more, because foreclosure can take a year or more, and the property is often severely damaged and neglected during that time.
Iyobhebhe will get no money from the sale. His credit score will take a hit, but not as bad as it would with foreclosure. In that way, the short sale may be the closest thing to a win-win Iyobhebhe and his bank can expect. But even so, it has taken more than six months to hammer out the deal. And it still isn't final.
Adam Leistico can relate. He's not trying to sell a house, he wants to buy one.
He and his wife looked at more than 40 houses, but they fell in love with a little blue rambler in St. Paul.
"We felt something we hadn't felt in the other places," Leistico said. "Both of us were grinning throughout the entire walkthrough and we finally just decided: This is the one. We're going to wait and see what happens with this place."
And waiting is exactly what they have done. Like Alfred Iyobhebhe's house, this one is a short sale. The Leisticos put in their offer at the end of February, and they still have not heard if the seller's bank will accept it.
"If it goes another month or two without hearing anything, I think at that point, we're going to jump back in with both feet and start looking at houses, and stop thinking about this one as even a possibility," Leistico said.
In a normal real estate deal, it takes just a day or two to hear whether your offer is accepted. But realtors say it takes at least a month to hear back on a short sale, sometimes several. For realtors, it is often a maddening experience.
"We fax [our application] in. We wait 48 hours, and then you have to call," said Scott Fricke, an Eden Prairie realtor. "And the usual response is: 'no, it's not in the system, yet.' We fax again. We wait another 48 hours. Then they'll probably sit on it for a week, and somebody there will decide there's something not right in the system."
The faxing and the phone calls continue. Buyers less patient than Adam Leistico get fed up and walk away. Deals fall apart, and sometimes the bank ends up having to foreclose after all.
"We think less than half of the short sales actually close," St. Paul realtor Teresa Boardman said, though she acknowledged there are no official statistics on the matter.
If the sale does not close, then the realtor doesn't get paid.
"I am not showing short sales to my buyers, and I certainly would not list one," Boardman said.
Short sales were almost unheard of just a few years ago. When home values were rising, the sale price was almost always more than the outstanding mortgage balance. Analysts say that is one reason banks are having difficulty processing the growing number of short sale applications.
"It's generally not what they like to do," Washington D.C.-based banking consultant Howard Glaser said. "They're not in business to take less money than is owed to them on a loan. So they've had to set up new systems to do this, and it's been very much in fits and starts."
The Treasury Department last month announced a new program to encourage banks and homeowners to pursue short sales as an alternative to foreclosure. It offers lenders a $1,000 bonus for each short sale they complete. And it would give the seller up to $1,500 to help with moving expenses. The program also sets up uniform short sale procedures for banks to follow.
The new program isn't up and running, yet. Once it is, Glaser expects it to streamline the process somewhat. But Glaser predicts short sales will still take longer than their name suggests.
- Morning Edition, 06/02/2009, 6:50 a.m.