Article published 12.16.07
By Jerry Gleeson
The Journal News
Your adjustable rate mortgage has reset and you can’t afford the higher monthly payments. In a sluggish real estate market, the property isn’t worth the same as the day you bought it. What’s next?
For homeowners and lenders who share a devalued asset, the answer may be a short sale.
Short sales are deals between borrowers and lenders to sell a house for less than what is owed on the mortgage. Such deals are uncommon in the Lower Hudson Valley, where property values climbed sharply in the early part of this decade before slowing down a year ago, but some in the real estate business expect their numbers to grow.
The growth of foreclosures in the region in the past year has been attributed to the increase in adjustable rate subprime mortgages. Such loans allowed people with less than perfect credit to buy property, often with little or no money down. Those resets are now pricing some homeowners out of their houses.
Short sales come with advantages and disadvantages for both borrower and lender.
For the homeowner, short sales avert a foreclosure process that can damage their credit record. Travis H. Olsen, president and principal partner of the National Short Sale Center in Scottsdale, Ariz., said foreclosure histories can keep someone from obtaining new credit to buy another house for up to 10 years.
Short sales aren’t perfect solutions for consumers, however, since they can still reduce a credit score by 75 to 100 points, said Burt M. Hoffman, a Stamford, Conn., attorney for whom such sales are becoming a growing part of his practice.
Lenders will consider such sales as an alternative to foreclosure because the latter process is time-consuming and costly, Olsen said.
Banks in New York can lose up to half of the mortgage’s value in foreclosure because the process can take up to 280 days. Interest payments go uncollected, unpaid taxes pile up, and lawyers and real estate agents must be compensated for their services. Disgruntled homeowners in arrears may let the property’s condition slide, or they may even damage the property out of spite or frustration.
“The numbers start to add up real quickly,” Olsen said. Selling a property short of what’s owed on the mortgage can get an unproductive asset off an investor’s balance sheet quickly.
There are conditions for doing such a deal, he said. The borrower must be unable to pay the existing mortgage, and the property must be worth less than the borrowed amount.
Homeowners walk away from short sales with nothing, and often less than that. The house is worth less than what they bought it for, so they’ve lost the closing costs and any equity in the property that might once have existed.
There may also be tax implications. The IRS treats the difference between what the homeowner borrowed and what the lender accepted to settle the mortgage as income to the homeowner.
That difference can add up to tens of thousands of dollars, and the homeowner will be expected to pay taxes on that amount. Congress is currently debating legislation that would reduce such penalties.
Not all lenders will accept short sales as a complete solution to the debt owed. Hoffman said a few banks want promissory notes from borrowers that require them to pay the full amount of the mortgage even after the short sale has been closed.
Short sales have “a lot of moving parts,” Hoffman said. “It’s a very tough deal to work. You have got to do it properly.”