The Story

I had a client call me the other day… his story was similar to many we have all heard over the last year and a half. He had been trying to sell his investment property for over two years but was very resistant to dropping the price, which he recognized was necessary to get any offer of purchase. His life savings had been depleted trying to keep current on this property and he had reached the end of the line. He was depressed, frustrated and resigned to losing the property and taking a credit “hit”. The bottom line for him was whether he should he “go to the trouble of trying for a short sale” or just “let it go to foreclosure”. He definitely wanted the easier road, which he thought would be a foreclosure. The consequences would be similar between the two . . . . right?

What do Lenders Say?

I flashed back to about two weeks prior when I was teaching a Short Sale and REO Transaction class for a local lender. The Senior Loan Officer had some material to share with us. First, she showed us actual credit reports of clients who had gone through a Short Sale. There was a “Before” and “After’ credit report for the same borrower. The Short Sale basically dropped this borrower’s credit score by one hundred (100) points. The mortgage also showed as “Paid in full but settled for less than was owed.”…. Okay, this was kind of what we would have anticipated and is certainly consistent with the information we have received from the lending institutions over the last year. Then we see the real show stopper. The Loan Officer hands out the new Fannie Mae underwriting guidelines that go into effect May 31, 2008. Guess what? The rules have changed.

REALITY BITES

The reality for my client on the phone becomes painfully clear. My advice: You better find a good agent who is competent and experienced in handling a Short Sale transaction. Under the new Fannie Mae guidelines the effect of a Foreclosure on a borrowers’ credit worthiness is substantial, devastating and decisive. A Short Sale may reduce your clients’ credit score and will stay with them for about a one year or twelve month period of time. For all our clients who have “let it go to foreclosure”, I have some very, very bad news. Effective May 31, 2008, according to the Fannie Mae guidelines, a client who has filed a foreclosure will be “ineligible” for a period of five years. That is FIVE YEARS (5 years) for a foreclosure compared with a one year “ineligible” for a Short Sale. That difference is significant and will have an immediate effect on our business.

Don’t be Surprised

It should be no surprise to us that the lending guidelines would adjust. We should have all seen this coming, right? Certainly the prior estimates of a 2 year credit hit for a Short Sale as compared to a 3 year hit for a Foreclosure were astonishing and somewhat unbelievable, leaving many of us to wonder if the effect of either outcome made no significant difference to our Seller, then why did it matter which outcome they pursued? The implementation of these new guidelines solidifies the rules and changes the desired outcome for many of our Sellers. As a result, I think we will all become experts on the Short Sale transaction.

It’s about Family

Last night as a storm entered into our neighborhood, I realized that at about 2:30 am it was one of the worst we had; had in awhile. I started to leave my bed, at the same time my three young daughters entered the threshold. Jennifer and I did our typical storm-ritual, we rolled out the blankets and pillows on the floor next to our bed, lit candles, said prayers thanking God for comfort and peace and made sure flashlights worked and were near-by.

As Jennifer and I nestled back in my bed I was thankful that we had been provided a place to make our children feel safe and then began to think about all the people who had no idea what tomorrow held for them, by way of housing. Yesterday I checked realtytrac.com and found that in Spotsylvania alone there were over 800 homes for sale, that were in some stage of distress, from short-sale to foreclosure. RealtyTrac estimates that one of every 200 or so homes is in foreclosure in Spotsylvania.

What about the People?

Back in December of last year I wrote about the serenity that some people found in having the burden of a home payment relieved in one fashion or another. This is not to say that I agree with individuals being allowed to walk away from the property, I don’t. However, there are many people who MUST sell right now and their home is no longer worth what they owe on it. In some cases it is because of not handling their finances well, and in other circumstances it could be the loss of work, family illness or a plethora of other issues. It seems that training for agents is ubiquitous, I know that I’ve taught more foreclosure and short sale classes that anything else. Jim Rake and I have just completed the Certified ShortSale Professional class and look forward to teaching it in the future, but these classes teach contracts forms, the need to protect commissions and typically protecting buyers. Not one of the courses talk about the people who are suffering through this market crises. We spend far too little time talking about the fear and embarrassment that families suffer when their home is foreclosed upon or to have to reveal to strangers that they cannot pay for their home and must sell.  We fail to address how humbling it must be to ask for benevolence from all involved with cut commissions, inherent delays and uncaring loss mitigation officers.

Agents who Care

More and more I hear agents telling me that they are talking their buyers out of looking at what appears to be distressed homes or those in short-sale. I get it, I really do. The majority of agents listing such properties aren’t properly prepared to do so. Sellers and agents have not priced a lot of these homes at a level that a lender would accept and have not started the process with the Seller in a timely enough manner to get to closing in a reasonable amount of time. HOWEVER, education is helping in these areas, lenders are starting (ever so slowly) to put better people and procedures in place to help with these clients.

My real issue is that all the bravado and gimcrack in the industry, in relation to what an agent chooses to show and not to show “their clients” is hurting many people. Only with the expressed permission of the buyer can an agent decline to show property that otherwise matches what the buyer desires. Yes, I know that it’s harder and you get paid less, but those will be the most loyal clients in the future. It’s hard for everyone right now and all we can do is pray that we will all have wisdom to overcome this in the near future. By looking at the current trends, it seems that there is some improving in the market, but with the large inventory of homes on the market; we’ve got a ways to go.