Short Sales of Homes on rise
Jeffrey Finch spelled out the problem in a hand-written letter: He’d lost his job as a minister, and his wife’s take-home pay as a teacher, $3,100 a month, did not cover their $3,300 mortgage payments.
“I can no longer afford my home,” he wrote in April to HomEq, the California firm collecting payments for two subprime mortgages the Finches obtained from WMC Mortgage Corp. when the couple refinanced their Jamaica Plain home last year.
Like hundreds of thousands of US homeowners, Jeffrey and Denise Finch were caught in a vise: Their monthly payments were increasing, but the value of their home was falling as the Real Estate market softened. The simplest avenue to prevent foreclosure — selling the property to pay off the loan — was not available to them because falling prices made the house worth less than the balance of the mortgage.
The couple found a solution to their dilemma — a “short sale,” in which a lender agrees to accept less than the total amount remaining on the mortgage, allowing the homeowner to sell the property at a lower price and pay off the small er loan balance.
As foreclosures soar nationwide, lenders are more eager to negotiate short sales to avoid the expense and hassles of seizing a delinquent customer’s property. Foreclosing on a house and selling it in an auction costs $50,000, on average, in New England, and that amount is on top of the funds the lender needs to pay off the loan itself.
Lenders “are not in the business of owning real estate,” said Fran Yerardi, president of Bay State HomeVestors in Newton, who negotiated the short sale on the Finch’s behalf. HomEq and investors who held their mortgages forgave $168,500 of the couple’s $440,000 total debt, allowing HomeVestors to buy their house for $271,500, renovate it, and resell it for a profit.
Short sales have shot up in Massachusetts: Between January and the middle of this month, 287 homes were listed by their owners as potential short sales, up from 51 a year earlier, said Barry Nystedt, a buyer’s broker in Newton. Bank of America Corp. stated that it receives nearly 50 requests each month for short sales nationwide — double last year’s number — often from borrowers with adjustable interest rates that have become unaffordable, said Robert Caruso, the bank’s national servicing executive.
“I expect it to increase” in coming months, he said.
Bank of America, which made $85 billion worth of mortgage loans in 2006 and services $360 billion in mortgages for other lenders, prefers that customers keep their homes, and thus often renegotiates the terms. “We want to help them keep the house if they have the desire and capacity, or we’ll try to help them with a short sale,” Caruso said.
Short sales offer major benefits to homeowners in trouble. By avoiding foreclosure or bankruptcy filing, the borrowers’ credit history will not suffer major damage, though delinquent payments may lower their credit score.
But short sales can be risky, because people in danger of losing their homes are often emotional and are prime targets for scams, regulators and community groups said. Once a lender files a notice of intent to foreclose in the Massachusetts Land Court, an owner is inundated with letters and calls from investors and realtors promising to help.
Since last August, the state has filed three cases against alleged foreclosure scams involving 46 homeowners.
Even when borrowers engage in a legitimate short sale, there is no guarantee of success. It’s difficult to forge an agreement that satisfies multiple parties, including such disparate interests as the lender, homeowner, buyer, agent, and investor who holds the mortgage. It can be even more complex if the sellers are divorcing. Husband and wife, and their attorneys, have to agree.
“It’s a huge nightmare” that requires “unbelievable patience,” said Framingham agent Jean Consigli of ERA Key Realty Services, which currently is offering several potential short sales.
Lenders sometimes reject short-sale bids. Thomas Butler, an experienced Utah short-sale buyer who sells books and videos explaining his technique, said 80 percent of his attempted deals close. But bankers said they frequently reject short-sale proposals for a variety of reasons, including bids they deem to be too low and minor problems, such as a homeowner failing to submit the proper paperwork.
Short sales can be bargains for buyers. Shirley Chatelain-Morantus, an agent for Coldwell Banker Residential Brokerage in Waltham, just negotiated one for Evelyne Durand, a lab technician at Massachusetts General Hospital.
Durand said she could only dream of finding a two-bedroom condominium for herself and her teenage son in Waltham, near extended family. She occasionally looked around, but condos there typically cost nearly $300,000. Then Chatelain-Morantus found a condo in a six-unit building being offered as a short sale for $209,900. The seller’s agent, Jean Raymond, said he proposed a short sale to the owners, a father and son, to prevent imminent foreclosure. He estimated the bank’s loss on the mortgage was about $30,000.
In the case of the Finches in Jamaica Plain, it took Bay State HomeVestors three months to negotiate the discount purchase. Bay State is a franchise of a Dallas company, HomeVestors, whose stock-in-trade is buying houses in poor shape, fixing them up, and reselling them. Its yellow billboards that state, “We Buy Ugly Houses,” dot the Boston area. Profits on individual deals can be anywhere from $10,000 up to, in rare cases, $100,000.
In anticipation of a declining market, Yerardi opened HomeVestors’ first New England franchise last year and has about 30 short sales in progress. Franchises are now in Braintree, Worcester, Connecticut, and Rhode Island, he said. The entire company has submitted more than 200 short-sale plans to lenders this year, he said. “Two years ago, you never heard of short sales.”
The Finches’ undoing was a subprime refinancing with WMC Mortgage, which they used last August to take $10,000 out of their home equity for renovations. Two WMC subprime mortgages were used to refinance a 30-year fixed mortgage obtained in 2005 to buy the house from Denise Finch’s mother. Their payments immediately jumped $900.
While Denise Finch lost the house in which she grew up, the couple bought a newer one — from HomeVestors — for $152,000 in Charlotte, N.C., where both have family.