Selling yourself short
Local mortgage lenders say
By Rob Perez
some homeowners facing foreclosure
have a less expensive alternative
Star-BulletinAbout twice a month, Honolulu Mortgage executive Teri Mignard gets a set of house keys in the mail. The keys are from Hawaii residents who have given up paying their mortgages. Reeling from a recent layoff, divorce or some other calamity, they usually have fallen so far behind on payments and their homes have lost so much in value that they decide to walk away from everything. They mail the keys to Mignard and, in many cases, virtually vanish.
Honolulu Mortgage ends up foreclosing on the property -- something Mignard says probably was unnecessary. A court eventually issues a deficiency judgement for the money owed, devastating the former homeowners' credit.
"It's a waste of our money and their credit," said Mignard, the company's assistant vice president for loss mitigation.
Usually unbeknown to the homeowner, there is another way out. It's called a short sale, and a small but growing number of homeowners and lenders are resorting to the practice as they struggle with Hawaii's faltering economy and falling real estate prices.
In a short sale, the value of the home is less than the amount owed on the mortgage. When the homeowner sells the residence, with lender approval, the lender gets all the proceeds and in many cases forgives the remaining balance on the loan.
In other instances the seller signs an unsecured promissory note to repay -- usually interest free -- a portion of the balance and the lender forgives the rest.
But in either case, the seller is better off than having a foreclosure blight his or her credit record. And the lender doesn't have to go through the lengthy, costly court foreclosure process, which usually takes at least nine months in Hawaii and costs thousands of dollars.
Excluding cases of financial mismanagement, "I've never seen an instance where a short sale didn't make more sense than foreclosure," Mignard said. For the lender, "a short sell is going to be less of a loss than a foreclosure. It's an obvious no-brainer."
Of course, no one likes to lose their home, especially when ownership is so hard to come by in Hawaii, one of the nation's highest-priced markets.
But when foreclosure is the only other option, the short sale is a better alternative -- assuming the lender will go along, consumer advocates say.
"The short sale is preferable if there are no issues that should be resolved by a court," said Janis Fenton, a paralegal with Legal Aid Society of Hawaii.
Not all lenders, however, permit short sales. Though most of the major banks here do, even if they don't publicize it, some lenders -- particularly those that specialize in so-called non-conforming or jumbo loans -- shun debt forgiveness.
"Those guys don't like to play ball," Fenton said.
Lenders stress that a short sale is not a way to escape a bad deal on a home or recover from badly mismanaged finances. The homeowners must be in financial distress due to circumstances largely beyond their control. And they can't have significant assets elsewhere that can be cashed in easily, lenders say.
The main reason local residents fall behind on their mortgages is job loss -- no surprise given that the economy has been bleeding jobs for four years. Divorce is the second most-common reason, lenders say.
Whatever the cause, borrowers should contact their lenders as soon as they realize they'll have problems meeting their next payment, lenders say. If caught early on, the borrower usually will have more options short of selling their home.
Depending on the type of mortgage, some lenders will restructure the loan, temporarily lower the interest rate, lengthen the pay-back period, defer payments for several months or do other types of workouts to help a borrower through a short-term pinch.
But Mignard said many delinquent borrowers are too embarrassed to seek a lender's help early on. They try to tread water by dipping into their savings, borrowing from relatives or selling assets, hoping they'll be able to recover before they get too far behind on the mortgage.
The economy, though, has prevented many from regaining their financial footing, Mignard said. And by the time they are three months behind on payments, the foreclosure process already has started.
If you are about to lose your home and have no chance of working through the financial crunch, ask your lender about a short sale.
A lender typically will look at a homeowner's assets and liabilities, what caused the financial hardship and the home's value before agreeing to a short sale. If such a strategy is approved, the homeowner arranges to put the home on the market, but the lender effectively has veto power over any deal.
One cautionary note: the federal government will treat forgiven debt as taxable income, so there may be tax implications for the seller in a short sale. Lenders advise clients to consult with a tax expert.
Tom Serocca, loan guarantee officer for the Department of Veterans Affairs on Oahu, said short sales are becoming more acceptable as Hawaii's real estate market worsens. Since October, there have been 22 short sales and only 10 foreclosures involving VA loans in Hawaii. In the prior year, the number of foreclosures about equaled short sales.
For VA loans, the typical loss to the mortgage holder in a short sale ranges from $30,000 to $40,000, Serocca said. For a foreclosure, the lender can be out $50,000 or more.
For conventional loans, the average short-sale loss is $10,000, while the average loss on a foreclosure is about $30,000, Honolulu Mortgage's Mignard said.
Who takes the hit depends partly on who is holding the mortgage.
If the loan has been sold on the secondary market, the investor holding the mortgage swallows the loss. If the loan is in the lender's portfolio, the lender eats it. If it's a government-backed loan, the federal government offsets part of the loss up to a certain amount and the lender writes off the rest.
So few people know about the short-sale option that Honolulu Mortgage in recent months began holding seminars for real estate agents.
It's clear, though, that the word isn't getting to some consumers who need it.
Mignard said the mailing of keys to her office seems to be on the rise. She also gets a couple letters a month from people asking where to send their keys.
In one case, a man who telephoned her said he had just gone through a divorce and couldn't afford to pay his mortgage any more. The man told Mignard that he left the keys with a neighbor. Then he hung up, never to be heard from again.
Honolulu Mortgage foreclosed on the property.
"It never had to happen that way," Mignard said.
Consider the case of a homeowner who owes $250,000 on a mortgage for a home purchased for $300,000 in 1991. Today the home may be worth $200,000. Who would benefit from a short sale?
If the homeowner lost his job and fell several months behind on his mortgage, with no prospect of recovering in the near future, he might be a good candidate for a short sale.
The lender might not agree and can foreclose on the property, but that means going through a court process that can last at least nine months. For that entire period, the lender probably won't recover the accumulated interest due on the mortgage, which can be tens of thousands of dollars.
Attorney and commissioner fees will cost another $8,000 to $10,000, according to attorney Marvin Dang, who represents lenders.
Then there's the headache of assuming ownership of the property: paying for someone to get it into marketable shape, to sell it and to maintain it in the interim. Lenders don't like tying up their money like that.
And even if the lender ends up selling the property, it likely will go for less than the $200,000. In a down market, foreclosure homes tend to depreciate by the time they hit the market.
Even after a foreclosure sale, the borrower still is responsible for any money owed the lender that isn't covered by the sale proceeds. But the prospect of collecting that money usually is slim. The homeowner can file for bankruptcy and escape the debt.
The bottom line: the lender will lose much more than the $50,000 plus expenses it stands to lose in a short sale (the difference between the $250,000 mortgage and the $200,000 sales price). The short-sale loss would be even less if the seller agrees to repay a portion of the shortfall.
Staving off foreclosure
If your home is worth less than your mortgage and you're facing foreclosure, ask your lender if a short sell is possible.
