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Short Sales Grow In Bad Housing Market

Attorneys use another tactic to stave off foreclosures

By DOUGLAS S. MALAN

The go-go days of easy, low-interest credit allowed a Dunkin’ Donuts clerk making about $20,000 a year to obtain 100 percent financing on a $650,000 house in Stamford.

He managed to make mortgage payments for a few months. Now that the loan’s interest rate has adjusted upward, his monthly payments exceed his family’s income.

It’s the classic tale of a defaulted loan and a property in foreclosure. But instead of going through the foreclosure docket in court, the homeowner has retained Orange attorney Kenneth Lenz to conduct a short sale of the house, which means selling it for less than the value of the mortgage.

In many circumstances, a short sale can help homeowners avoid major hits to their credit standing by dodging a foreclosure judgment and possible bankruptcy. It also spares homeowners from the social embarrassment of a foreclosed sign staked in their front yards.

For banks, sometimes it’s the only way to recoup any value, even at a loss, from mortgages that once were handed out freely with lax standards. The last thing a lender wants is to accumulate properties that it needs to sell at auction.

Connecticut attorneys say homeowners’ requests for short sales are more common than ever before. “That would be the understatement of the year,” said Shelton attorney Gary Seymour of The Seymour Law Firm. Among his many clients, Seymour represents an investor who gambled on 13 properties in Florida and now has $3 million in outstanding debt that he cannot pay.

Countless homeowners have taken out so many loans against their home to pay other bills that the value of those mortgages now exceeds the fair market value of the homes. These loans are known to be “upside down.” The addiction to borrowing has placed many families on the brink of bankruptcy. “That’s the American way,” said Timothy M. Pletter, of Ambrogio, Pletter & Associates in Stratford. “People live on credit.”

White-Collar Impact

Many of Pletter’s current clients were relying on overtime pay to cover their mortgage bills, but the slowing economy has meant hour reductions that leave household budgets short, especially as energy and food costs increase. What was once a blue-collar phenomenon has now spread to more white-collar homeowners.

“The last six months, I’ve been seeing higher income clients,” Pletter said. “People who are making six-figure incomes are living paycheck to paycheck and can’t pay their bills.”

He continued: “Short sales are becoming more and more prevalent. I saw more of them this summer than I did in the spring.”

Homeowners are not eligible for a short sale until they have defaulted on their loan and received a pre-foreclosure letter from the lender. Once that’s happened, the lawyer contacts the lender about a possible short sale, and the lender sends out appraisers to determine the house’s value. In some cases, the houses have been on the market for a number of months.

When an interested buyer emerges, the offer is contingent on the lender’s approval of the buyer’s finances. Once the parties are aligned, the check written by the buyer at the closing goes directly the lender. The amount is less than what is owed by the borrower/seller on the original mortgage and doesn’t usually cover money owed in additional mortgages.

Sometimes the lender demands the borrower sign a promissory note to make up for the difference, but those demands are being made less frequently. Lenders “know those are not likely to be collectible,” said Lenz.

But Seymour has noticed in the fine print of the short sale documents that lenders are releasing the borrower from debt accumulated to that point, but preserving the lender’s right to, in the future, go after the difference between the sale price and outstanding mortgage amount.

Some borrowers just gamble that the lender never will take the steps to track them down, Seymour said.

Numerous Variables

The short sale process can take about 60 days to complete, and in a market flush with available homes, a common obstacle is a sale that falls through because an impatient buyer finds a better deal elsewhere. “There are so many tentacles coming off a short sale,” Seymour said. “It’s a very involved process.”

With antsy buyers and a narrow window of opportunity, Seymour said it’s key to know what lender is involved and how receptive that company is to getting short sales done quickly. For that insider knowledge, he hires a St. Louis-based information technology specialist who spent 30 years in the banking industry.

Those contacts allow Seymour to get a handle on what his client can expect from the process at the very beginning. That’s pivotal information, he said, because “the institution that you’re trying to do a short sale with also will move forward on the foreclosure. There’s zero guarantee that any bank will hold off on a foreclosure.”

If one potential buyer submarines a deal by going elsewhere, the borrower’s options are foreclosure or filing for bankruptcy and conducting another short sale.

As foreclosed houses pile up in banks’ portfolios, some homeowners are taking advantage of the glut by living rent-free for several months before the bank gets around to eviction. “I have one client who’s been living in her house for 14 months,” said Lenz, the Orange lawyer. “I think the bank thinks it’s better having someone cut the grass other than them.”

Then there’s what’s known as the “jingle letter,” when foreclosed homeowners simply walk away from everything and mail the house keys to the lender.

BusinessWeek reported in late July that Connecticut ranked third in the country with 27 percent of existing-home sales involving foreclosures during the second quarter of this year. For the same period last year, foreclosures made up 12 percent of all sales.

Only California and Nevada ranked higher this year with about 40 percent of home sales involving foreclosed properties during the second quarter.

Walter Molony, a public affairs official with the National Association of Realtors, told the Law Tribune that the NAR has not singled out short sales in identifying national trends, but noted that their research indicates that distressed sales, which would include foreclosures and short sales, constitute 40 percent of transactions this year.

“It has been a significant part of the market,” he said. •