Why Short Sales Take So Long?

6 Replies

Newbie question. 

I read a lot of people complaining that short sales take too long. 

Would attempting to short sale on properties that are about to foreclosure motivate lenders to move faster? I read that lenders rather get rid of properties than go to foreclosure. 

No.  The process, whatever it is, is still the same.

Has it always taken this long?

Won't banks that are in financial trouble want to speed up the process? 

I have 2 reasons why I think they take long:

1. Banks have plenty of excess reserve; therefore, they are not under pressure to close quickly. 

2. Secondary mortgage institutions, which owns the mortgage, are backed by the government, could care less. 

Do you think my analysis is correct?

Nope, neither is correct. Almost all short sales are properties already in the foreclosure process. Loan investors have a protocol and procedure to be followed to make sure people really need a short sale and aren't just bailing on an upside down property at the owner of the loan's expense,; to get as close to FMV as possible; analyze whether a foreclosure will net more money;negotiations with junior lien holders; mortgage insurance providers approval; etc, etc. "Secondary market holders" (FANNIE/Freddie) are not reimbursed by the govt.

...and banks aren't in financial trouble these days. Failed (Failing) institutions are a thing of the past for the most part and any bank failing, would more than likely be acquired by the FDIC and sold to another bank under a loss share agreement with the acquiring bank.

Your first "reason" contradicts your statement. If they have excess reserves, they probably aren't in financial trouble. To your theory though, not being in a hurry to speed up the process just doesn't make any sense and, would be in violation of CFPB rules to decision any alternative to foreclosure within 30 days of receipt of a full package.

Your second "reason" Wayne already refuted. I would only add that while they are the majority player, Fannie/Freddie aren't the ONLY secondary market out there. Assuming the loan was sold to the secondary market, the investors want as much yield on their investment as possible so they are even more motivated to process the transaction.

I've personally found a majority of delays in a short sale transaction to be the borrower and/or the agents involved. The borrower hires an inexperienced agent to do a short sale and the agent has no idea where to start other than to do what they always do, list a property for sale and hope a buyer comes in. They open escrow, escrow sends a demand to the lender, lender comes back with a demand higher than sales price. Everyone scratches their head and asks what happened. When the dust settles, the agent realizes, "Oh crap, this is a short sale". THEN they start over. They call the lender, and lender says, Need 3rd party authorization. They get it. Agent asks what’s needed. Lender says, "Short sale package". After agent figures out what that is, agent goes and gets short sale addendum and THEN contacts borrower to tell them, "Hey, need a short sale package from you, like 4506, income/expense and budget forms, paystubs, tax returns, etc. Borrower says, "What? I thought we were ready to close, what's this last minute stuff". Agent blames lender. Borrower finally coughs the stuff up and gives to the agent". By this time, buyer's walked.

Process starts over with new buyer. Agent finally catches on and submits new short sale package. Borrower finally catches on and realizes there are many cogs spinning in this thing. Lender goes back and says, "Pay stubs are old and stale dated. Need everything updated. New income/expense/budget, etc..". Agent finally submits everything and it's all updated except...Lender has a new appraisal now because so much time has passed and value has gone up. Everything needs to be redone again. Buyer walks because they won't pay more.

...Starting to get the picture here?

I'm not saying that is the way all short sale transactions work but, at least at my bank, if there are delays, that's usually why and oh, forget about it if there is a first and a second lien holder involved (Well...don't forget about it, just remember you have two lenders to give the same info to). If you have a half decent agent, the delays and headaches are significantly reduced.

As a short sale underwriter working at a big national bank, the reason short sales often take so long is because the seller often has to submit a lot of personal financial information that accompanies the actual deal.

And since a lot of people looking to do a short sale are often delinquent and in foreclosure, most of these folks are often in bad financial situations apart from their hosing issues. And folks whose financial lives are not in order often have a very difficult time submitting a lot of the basic documents that the VA/USDA/FHA/FHMLC/FNMA require, as they often have things on their tax returns or in their bank statements that raise a red flag, or require additional docs, letters of explanation, etc in order to analyze their personal finances. Some investors want to know the seller has an actual legitimate hardship, and/or are looking to see if they can't get some extra cash from the seller at closing, or to issue a 5-10 promissory note to the seller to reduce the delinquency.

There is also the issue of the investors requiring a lot of exceptions to offers that hold up the actual deals. Most investors require net proceeds of at least 84-88% of the fair market value. Anything outside of this requires direct approval from the lender themselves, which often adds a couple weeks to your turn around time. Then there are issues with seller concessions that often hold deals up.  Junior lien issues can be a big thing too.  

Apart from these things, a very solid listing agent who really knows what they are doing regarding short sales is absolutely essential.  There are a lot of agents out there that really don't know what they are doing.  From my end, I've seen listing agents who are ultimately to blame for the speed of the processing and getting everything through within an expedient manner.  A good short sale listing agent is worth every penny. 

Jimmy

Originally posted by @Jimmy Humphrey :

As a short sale underwriter working at a big national bank, the reason short sales often take so long is because the seller often has to submit a lot of personal financial information that accompanies the actual deal.

And since a lot of people looking to do a short sale are often delinquent and in foreclosure, most of these folks are often in bad financial situations apart from their hosing issues. And folks whose financial lives are not in order often have a very difficult time submitting a lot of the basic documents that the VA/USDA/FHA/FHMLC/FNMA require, as they often have things on their tax returns or in their bank statements that raise a red flag, or require additional docs, letters of explanation, etc in order to analyze their personal finances. Some investors want to know the seller has an actual legitimate hardship, and/or are looking to see if they can't get some extra cash from the seller at closing, or to issue a 5-10 promissory note to the seller to reduce the delinquency.

There is also the issue of the investors requiring a lot of exceptions to offers that hold up the actual deals. Most investors require net proceeds of at least 84-88% of the fair market value. Anything outside of this requires direct approval from the lender themselves, which often adds a couple weeks to your turn around time. Then there are issues with seller concessions that often hold deals up.  Junior lien issues can be a big thing too.  

Apart from these things, a very solid listing agent who really knows what they are doing regarding short sales is absolutely essential.  There are a lot of agents out there that really don't know what they are doing.  From my end, I've seen listing agents who are ultimately to blame for the speed of the processing and getting everything through within an expedient manner.  A good short sale listing agent is worth every penny. 

Jimmy

 Jimmy

Great to hear from a man in the trenches, My team and I have been very successful processing short sales for over the last 7 years.  We can always tell when we are speaking to a professional like yourself and very much appreciate it.  Keep up the great work.

Jim from Riverside, Ca

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