San Francisco Short Sales FAQ

Before we get in to the short sale FAQ, let’s take a look at all the pending short sales in SOMA.  These are short sales that are in process, waiting for approval from one of the lenders on the property.  There are currently 25 pending short sales in SOMA (includes Yerba Buena, South Beach, and Mission Bay).  Here’s the list of addresses, list prices, and days on market from the San Francisco MLS as of 3/26/2012:

What is a “legitimate hardship?”

A legitimate hardship is when the borrower’s personal situation has experienced a change which prevents the borrower from making payments as originally agreed.  Some examples of common hardships:

  • Death of an income earner in the family
  • Divorce
  • Large loss of income (long-term or permanent)
  • Job relocation or job loss
  • Mortgage payment adjustment that makes the payments unmanageable
  • Health issues

The hardship must be a long-term situation.  If the owner simply had a bad month or still has money in savings and retirement accounts, the bank is less likely to approve a short sale.

Why would a lender allow a short sale? 

There are a number of reasons why a lender would release you from your obligation, and all of these scenarios involve an inability to repay the loan according to the original terms.

Lenders (and the investors who back the lenders) have realized it is good financial decision to deal with their non-performing assets swiftly.  As an additional challenge, many houses reclaimed through the foreclosure process are not in pristine condition—appliances are missing, garbage and miscellaneous items are left in the property, and sometimes valuable fixtures, such as copper piping, have been stolen.  Repairing a trashed and looted house is time-consuming and expensive.  A short sale is a much better solution for the lender than a foreclosure.

What are states, counties, and cities doing in response to the mortgage crisis?

Many cities and counties are offering resources such as counseling and workshops for distressed homeowners.  The sessions are free and informational in nature.

In addition, some municipalities are making it very difficult for lenders to foreclose.  For example, I know a city that imposes a fine of $1000 PER DAY if a foreclosed property is not up to their standards of maintenance.  The violation could be something as simple as having a lawn that has grown a quarter-inch too long.

Another example of municipality intervention was in Chicago.  For a few weeks in 2008, the Cook County Sheriff simply refused to evict anyone from foreclosed properties.  If you were the lender in that situation, what would you do then?  It would be out of your control.  A short sale would have been better.

How do lenders normally react to delinquent mortgages?

All lenders would like to see their mortgage payments arrive on the first day of every month, or maybe a little late so they can charge late fees without too much fuss.  When mortgage payments do not arrive, lenders take certain steps to protect their interests.

Most lenders will make phone calls and send letters to the borrower, hoping to collect the mortgage payment.  Other lenders will simply do nothing and hope the owner will find a way to become current with the payments again.  I have heard stories of homeowners being delinquent for an entire year with no action from the lender.  Normally, a notice of default is filed after 90 days of non-payment.  A notice of default (or NOD) is the first step in the foreclosure process.  It gives public notice that the owner has defaulted on payments and the bank is moving forward with the foreclosure.  Today, there are situations where the notice of default is simply not filed while the lender figures out what to do next.

A new twist to the lenders’ strategy is the $700 billion bailout package.  Since nobody knows where all the money is going to go or how it will impact bad loans, many lenders are “on hold” with their decisions.  They are waiting to see if they will be able to recover some of their money through government handouts.

What is the advantage for me to attempt a short sale instead of letting the house go to foreclosure?

There are several advantages to the short sale route.  First and foremost, a short sale is much less damaging to your credit score than a foreclosure.  It is currently possible to purchase another home only a few years after you have completed a short sale on a previous property.  Your credit report will show a “settlement” on the account versus a “foreclosure.”

Secondly, there may be some debt relief from the short sale.  In many foreclosure cases, the lender can receive a judgment against you for the difference between the final sale price of the property and the mortgage balance.

However, not all lenders will completely release you from your loan obligation in a short sale.  Some of them require an unsecured promissory note for the difference between the sale price and the loan balance.  If you are not willing to sign the promissory note, the short sale will not be approved and the borrower will be stuck with the house.

Some lenders have realized that forcing a short seller to sign a promissory note does not do much to help recover their loss.  Basically, they are trading one non-performing asset for another non-performing asset.  If the sellers cannot pay the mortgage, it does not make much sense to think they would be able to pay an unsecured note.  Some of them might, but the short sale probably would not have been approved if the sellers had the financial capacity to pay their debts in the first place.

As time goes on, more lenders are waiving the promissory note requirement.  Pending legislation will impact this specific situation in many states.

Can I approach my lender about a short sale if I am current with my payments?

Yes.  Your lender will be concerned if you are experiencing a hardship that is long-term and is not likely to change.  Every situation is different and all lenders have different rules.  It is a good idea to open dialogue with your lender as soon as it looks like you may have an issue.