Most folks these days know what a short sale is, but here’s a quick review: A short sale is when a home is bought for less than what the seller owes the bank.
The lender being “shorted," or getting paid less than they are owed, has to agree with the terms of the new buyer and the purchase price being offered. For more information, check out Mortgage News Daily’s explanation here: What is a Short Sale and how do they work?
Easy-peasy, lemon-squeezy, right? Wrong.
Anyone who has ever been involved in a short sale, regardless of whether they were the buyer or seller, can tell you that there is nothing easy, quick, or short, about a short sale.
A typical short sale will probably last between three to six months (after a new buyer has made an offer) and there have been cases where the transaction lasted close to two years.
No, that is not a typo. Two years.
Most people don’t understand the biggest question related to the long length of a short sale, which is: Why does it take so long? "Short sale" seems like a misnomer.
There are many reasons why a particular short sale would take so long. Some examples include the amount of sales transactions an individual bank negotiator might have in their pipeline at any given time. I’ve heard the stack can be several hundred at a time.
It could take days, if not weeks, for this person to get to the file. Another reason is the amount of documentation required (er, requested) by the lender.
It could take another couple of weeks sending emails and overnight packages back and forth before the bank accepts (not yet even approved) the new submitted offer initially, simply because the “package” isn’t how they want it to be.
The reasons above are the obvious examples of why a short sale takes so long. And, quite frankly, the perception is that these reasons are the dominant factors. There is another cause, though, that is actually more important and “eye-opening” than any other reason listed here. It's one that most people never even conside, or are even aware exists. It is, in fact, the most important reason for the delay of a short sale.
For the explanation, I’m going to use Bank of America as the example, primarily because these statistics are actually their numbers. Of the millions of home loans that Bank of America services, it is reported that only 15 percent of them are actually “held” by Bank of America. The other 85 percent are sold on the Mortgage-Backed Security (MBS) secondary market.
The secondary market allows Bank of America to replenish the cash reserves so they can originate more mortgages to more consumers. The 85 percent of “sold” loans are comprised of approximately 500 investors on Wall Street. Of these 500, only about 50 are the big public banks and thrift institutions. The other 450 are private investors and hedge funds.
Confused yet? Now, let’s go back to the beginning of a short sale transaction.
After the buyer’s offer has been successfully submitted to the bank for “approval," the bank negotiator has to then turn around and hand it to the entity holding the note. So, in Bank of America’s case, only 15 percent of the time can they keep this negotiation in house and get an answer quickly. Some 85 percent of the time they have to go outside the institution to get the approval from the investor holding the note.
Once the offer has been taken outside Bank of America for approval, the negotiator now has to deal with this third party investor and convince them that the offer on the table is the best they’re going to get, and to validate the value of the property (and the offer) to the investor.
Now, for those investors with hundreds of millions or even billions of dollars under management, having to lose some cash on a short sale is not a big deal, or at least it’s an acceptable loss under the circumstances.
But what happens if the investor is not a big bank? What if the investor is a smaller entity? For example, picture this scenario: Back in 2005, the Hillside Unified School District pension fund (made-up school district for our illustration) decided to invest in the MBS market, sold on the great returns that the MBS market was achieving as home values continued to skyrocket. The HUSD Pension fund took $2 million of the cash and invested into the market.
Now, fast-forward to March this year, where home values have dropped by as much as 50 percent or more nationwide. And now, you have a homeowner needing to sell their home “short," say, $200,000 less than the mortgage owed.
The nice polite bank negotiator from Bank of America now has the lovely job of trying to convince the HUSD pension fund that they are going to have to accept a big loss on their investment.
What do you think the HUSD Pension fund says to the negotiator? NO.
That’s right, the retirees of the HUSD don’t want to agree to losing $200,000 (just on this one deal), and so they decline the first offer they get, hoping to get more.
The negotiator then comes back to the listing agent with the official decline, telling them to up their offer. The listing agent turns around and tells the buyer’s agent, etc.
The buyer, of course, says, “but the comparables in the neighborhood don’t support anything higher…” and may decide to walk away.
OR, even if the buyer is willing to up their purchase price, the appraisal probably won’t support the new, revised offer, and the run-around starts all over between buyer, buyer’s agent, seller’s agent, bank negotiator, and investor. Ugh.
While this little scenario doesn’t relieve the utter anguish involved in today’s new short sale process, I hope it certainly explains the "why" a little better.
Here’s to hoping your next short sale is indeed, well, short.
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