DETROIT -- Short sales are among the most arduous real estate transactions, often taking six months or more to close -- if they get done at all.
2009 file photo by Laura Segall, for USA TODAY
They can be a life raft for distressed homeowners who owe more on their houses than what they're worth, but the experience depends on a variety of factors, such as the number of lenders involved and whether there's a hardship, mortgage insurance attached or whether the buyer has the patience to stay with the process.
A short sale occurs when a lender agrees to accept less than what the homeowner owes. The transaction requires that the homeowner has a financial hardship.
Homes with more than one mortgage and mortgage insurance tend to take the longest, said Ellen Mahoney, president of Complete Title Services' loss mitigation division in Birmingham, Mich. A growing reason short sale deals fall through or take longer is because of mortgage insurance purchased after the homeowner closes on the deal and the loan is later sold to other lenders and investors.
Unlike private mortgage insurance required for sellers who put less than 20 percent down, these lenders and investors buy insurance to minimize risk. It is known in the real estate industry as pool insurance because it covers a group of loans that have been purchased.
Premiums are paid by the lender or investor and the homeowner isn't aware of it.
When the loan defaults, such as in a short sale, the mortgage company may demand that the seller pay part of what is owed to minimize its losses.
"That's a mess. They are the worst," Mahoney said. "It is usually the lender mortgage insurance that nobody knew about, and it is usually on the second mortgage. It is real disruptive."
Often, the bank holding the first mortgage isn't made aware that the second mortgage had been insured until the end of the process, even if both loans are with the same lender. If the mortgage insurance company doesn't sign off on the deal, the process starts over again.
These kinds of delays mean buyers walk away because of the time and frustration involved.
Brian Pannebecker, 52, of Shelby Township, Mich., made an offer on a home in his neighborhood only to have the bank reject it.
"I would never ever look at a short sale. I would go right to a foreclosure, which I eventually did. It was much, much easier."
Instead of buying in Michigan, Pannebecker bought a two-bedroom condo in Ft. Myers, Fla., near where his father retired. He made an offer that was accepted within 24 hours during the holidays. The whole deal closed in six weeks.
Buyers don't typically ask to see short sales unless they have the luxury of waiting for an undetermined length of time to move, said Renee Reyer, a Realtor with Clients First Realtors in Canton, Mich.
Reyer does her homework on short sales. She checks the property history and finds how many mortgages the seller has to determine how difficult the deal might be to close. Based on that information, she works out the percentage of risk that the property won't close and presents that to her clients.
Banks say they've been working harder to make the short sale process easier, but they acknowledge the delays.
At Chase the average response is 30 days from request to approval, said spokeswoman Mary Kay Bean in Detroit. Chase has completed 120,000 short sales using its own process nationwide since June 2009 and is now averaging 5,000 a month.
Pitfalls abound
The federal government's program to streamline short sales -- know as the Home Affordable Foreclosure Alternatives Program -- has yet to gain traction because it doesn't allow the lender to collect on the home's deficiency.
The program was launched in April 2010, and through May of this year, only 8,541 short sales were completed nationally through the HAFA.
Klorinda Hibbert, a real estate agent at Re/Max in the Hills, has noticed changes in the past year -- and they aren't for the better.
"The banks are willing to go into foreclosure rather than do a short sale," Hibbert said. "They want to get paid in full."
One reason Hibbert said she thinks lenders are allowing short sales to go into foreclosure is that if the mortgage is insured, lenders and investors can submit a claim to recover some of the money.
In a short sale transaction where mortgage insurance is involved, the mortgage insurance company gets a say in the sale price of the home or asks the seller to agree to repay part of the loss over time, and that can create more delays.
"The mortgage insurance companies are making them almost impossible. That's a whole different animal," Hibbert said. "We can have the bank approval and then the mortgage insurance company stalls for two months, and they want more money."
Alan Goldberg, director of strategic loss mitigation activities for Genworth Financial, a Richmond, Va.-based company that specializes in mortgage insurance, said investors can buy additional coverage if their analysis of a pool of loans indicates more risk than they are comfortable with.
Short sale shy
Many Realtors avoid short sales because they can be so difficult, including Michelle Chappell, an agent with Real Living John Burt Realty in Oxford. She sold a home this spring that took eight months to complete. She represented the third offer.
"This was the last one I sold. I said no more. I won't do it," she said. "They are just heart-wrenching for these buyers."
Chappell said the buyers looked at 80 houses before seeing "the one."
"Whatever bad could happen in this deal, happened," Chappell said. "I don't see any change in short sales. I don't understand that. There should be some kind of general process that everyone goes through. It just differs from bank to bank. It's almost as if they are throwing curves in there."
Qualifying for a short sale
What you will need to qualify in terms of paperwork and forms can vary by lender. Here are three key things a homeowner would need to qualify for a short sale, according to the Certified Distressed Property Expert website:
Financial hardship: There is a situation causing you to have trouble affording your mortgage.
Monthly income shortfall: A lender will want to see that you cannot afford, or soon will not be able to afford, your mortgage.
Insolvency: The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.
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