We are often asked why it takes so long to close a short sale, especially since the banks and Government say they have streamlined the process. Below are a few of the many reasons we’ve discovered as the Urban Team has ventured into helping people through the short sale process.
Secondary Financing:
Many homeowners have more than one loan on their property. Since the primary lender is taking a loss, they are reluctant to give much, if anything, to the second lien holder. Often this is not acceptable to the investor in second position and they draw a line in the sand and become uncooperative.
A common scenario is the secondary lender wants a settlement of 10% of the loan amount. Let’s say the loan was for $40,000, then they want $4000.00. The problem is many primary lenders cap the amount the will offer the lender in 2nd position at $1000.00 - $2000.00. The result is a battle of wills. PMI, something we will be discussing in a moment, can effect the outcome of the battle as well.
Homeowner’s Credit Report:
Lenders are now checking homeowner credit reports. If the report shows the borrower is current on most everything except the mortgage, some lenders are pushing him/her to sign a promissory note for the shortfall. Most reasonable people aren’t too keen on signing away their future simply to avoid foreclosure and a take bigger ding on their credit report.
PMI Insurance:
PMI is often the biggest hurdle to overcome and the hardest to anticipate or even be aware. Let’s start with what PMI is and how it effects the negotiations.
PMI is an insurance policy lenders take out when borrowers offer less than a 20% down payment. The PMI insurance kicks in when the loan goes into default and is taken back by trustee sale or judicial foreclosure.
Let’s look at a common example of how PMI is used by the lender. A homeowner buys a house but only has enough money to put 10% down. The lender takes out a PMI policy on the other 10% and the borrower pays the insurance premium.
So, how does this effect a short sale? There are three major factors to consider.
- PMI insurers like to see borrowers sign promissory notes because it reduces their payout to the lender. The promissory note is credited against the shortfall. Thus, they push the lenders to require the homeowner to sign a promissory note because it reduces their liability.
- PMI insurers can put off a payout by not accepting the short sale and forcing a foreclosure. Since, they earn money on their investments, PMI insurers like to keep it as long as they can and forcing a foreclosure can put off the payment for several more months. In their minds this just makes good business sense.
- The third problem is a bit complex. Let’s say a second lien holder has a PMI policy that will payout 10% of their loss and the lender in first position is offering a 5% payout. Let’s do the math… if they refuse to accept the 5% offer and kill the short sale they will get a 10% payout from the PMI insurance company. What would you do? You’d probably refuse the offer and hold out for 10% or let the property go to foreclosure and take the 10% a few months down the line.
So, now you have a better sense of why lenders are reluctant to suck it up and agree to the short sale. To most lenders it is simply a matter of looking at the bottom line and deciding what direction provides the best outcome to them.
