The short-sale wrinkle

'And the people on the bus go up and down...' -Children's song

Are you wondering why it takes so long to get short sales approved? The real reasons may be very different from what you might believe. And what you believe is...well, beyond the pale of understanding!

In a recent article by Bernice Ross in Inman News, she lays out the logic path so many lenders in both first and second lien position are taking. That is, 'Nobody should get anything from a short sale but us!' So first lien holders have a cap on what second position interests may want, and so on down the line. The upshot of it all is that with nobody willing to play ball, the short sale process is inordinately long, cumbersome, painful and unnecessary.

As she states, 'One of the biggest issues in closing short sales is secondary financing. If the holder of the first mortgage is going to have to take a loss, it usually is reluctant to give any type of payoff to another lender who is in second position.

The holder (or holders) of the secondary financing can refuse to cooperate unless it receives part of the sale proceeds.

A common request that many secondary lenders seem to be making is for 10 percent of their loan amount. If the loan goes to the loss recovery department, the request can be $5,000 plus 10 percent of the loan balance.

What's messy here is that the holder of the first mortgage may have a cap on what it will allow to be paid to any secondary lien holders.'

You see there is no honor among thieves!

Now enters the PMI that has insured the individual liens. Ross continues, 'Complicating issues even further, many borrowers who placed less than 20 percent down on their property have private mortgage insurance (PMI).

Here's an example of PMI: Assume that a borrower is putting 10 percent down and obtaining a 90 percent loan. The lenders normally would require a 20 percent downpayment and would give an 80 percent new loan. PMI insures the 10 percent "difference" between the borrower's down payment and what would have been an 80 percent loan amount.

What seems to be a common source of frustration for both agents and consumers is that the PMI companies have joined the lender in asking homeowners to sign a promissory note for the shortfall amount.

PMI companies are insurance companies. Like other insurance companies, it's simply good business for PMI companies to limit their losses and payout. If the consumer will agree to the promissory note, then that reduces the PMI company's losses, which looks better on its balance sheet.

On the other hand, if the PMI company agrees to the short sale, it has to make an immediate payout on the lender's claim. By refusing to approve the short sale, the PMI company forces the lender to foreclose on the property.'

Knowing this information ahead of time is critical if you want to avoid wasting your time on a transaction that won't ever close if you are a real estate agent, seller or buyer.

This may explain why so many holders of secondary financing are unwilling to agree to a short sale and prefer a foreclosure instead.

Good luck!