Sunday, September 9, 2007
No shortage of short sales
The number of new listings ballooned from 23 in the 30 days ending on Aug. 23, 2006, to 193 in the same period this year.
By JEFF COLLINS
The Orange County Register
The owners of an Anaheim fixer-upper got into a pickle when the value of their two-bedroom condo fell below the $335,000 they owe on their mortgage.
Unable to afford their monthly payments, they ended up with just two options: lose the home to foreclosure, or sell it themselves for less than they owe and ask the lender to eat a loss of $25,000 or more.
If the lender agrees, the condo will be sold as a "short sale" – a deal in which the property is sold for less than what the sellers owe on their mortgage.
Short sales have skyrocketed in Orange County during the past 12 months, according to new figures from the Southern California Multiple Listing Service.
Figures show that 193 new Orange County listings appeared in the MLS from July 24 through Aug. 23.
That's up from 23 Orange County short-sale listings added in the same period in 2006.
Borrowers trapped
Real estate agents say the 739 percent increase is yet another indicator of how quickly fortunes have turned for overextended homeowners caught in the current housing slowdown.
Agents blame the rapid rise in short sales on the same factors that have caused similar increases in foreclosures: flat or declining home values and tighter lending standards that have trapped borrowers in mortgages they can't afford.
"It's really just a (result) of several years of very liberal (loan) qualifications," said Ken Wagner, a member of the Short Sale Advocates division of Century 21 Superstarsin Yorba Linda. "Lots of people got those loans expecting the market to continue to go up, and the market didn't."
Wagner said that the bulk of people seeking to do short sales bought their home within the last three years, when prices were at or nearing the peak of the market. Many used subprime loans. Others were homeowners who bought earlier, then refinanced into a much bigger loan with escalating payments.
In the past, rising home values increased the amount of equity borrowers had, making it possible to refinance before their payments or interest rates got too high. When prices stopped rising, finding a new loan before payments reset to higher levels got more difficult, especially when lenders all but eliminated no-documentation loans and 100-percent financing.
"A lot of it is first-time home buyers or people trying to move up too far too fast," Wagner said of those seeking to do short sales.
A graceful exit
For sellers facing the possibility of default, a short sale can be a way to exit their difficulties without the trauma and damaged credit that occurs in foreclosure.
Before short sales can go through, however, homeowners must get their lenders to agree to take less than what they are owed. Lenders sometimes agree to a short sale because their loss could be greater if they foreclose on the home and have to sell it themselves down the road.
There also can be tax consequences for sellers doing a short sale. The difference between the amount owed and the sales price often can be treated as ordinary income, and get taxed, by the IRS.
The total number of short sales is still tiny: 597 Orange County listings in the MLS on Aug. 23 indicated that the seller sought a short sale, the Southern California MLS reported. That's just 3.3 percent of the 17,881 homes listed for sale in the county on that date.
On the other hand, the rate at which they have been added to the MLS has accelerated steadily in the past year.
"We saw a huge increase in this in May or June," said Mac Mackenzie, an agent for Coldwell Bankerin Irvine. Between 15 and 20 of the 60 listings he now has are short sales, Mackenzie said.
Mackenzie also believes that the number of short sales is far greater than indicated in the MLS. Many sellers are afraid that disclosure would scare off potential buyers since short sales are more complicated and take far longer than normal sales.
"I would take the rate of disclosures that you see and (multiply) it by five," he said.
Lenders backlogged
Mackenzie estimated that only one out of every two proposed short sales succeed, with the rest ending in foreclosure. Wagner heard estimates that just one in 10 or two in 10 such deals go through.
Most short sales fail because lenders have a backlog of such cases to process and because escrows usually take much longer, causing many buyers to back out before a deal is completed, said Vanessa Liddell, president of Shortsaleplan.com, a short-sale consultant in Yorba Linda.
Ron Garber, founder and chairman of Shortsaleplan.com, said lenders are starting to show more willingness to approve short sales.
"The lenders are starting to gear up their departments and be more efficient," Garber said. "It's becoming more of a pure economic decision where lenders are looking and thinking what makes sense. … Before, they were playing hardball because they didn't think it would be as dramatic as it truly is."
Contact the writer: 714-796-7734 or jcollins@ocregister.com
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