Short Sales, Legitimate and Fraudulent

Short sale is a common tool for home owners under a mortgage stress to sell property, with the lender's permission and relief of a mortgage which may exceed the sale proceeds. In this mortgage crisis, often the loan amounts which are obligated against the property exceed the value.

Many are unwilling or unable to continue to pay on the mortgage and default on that obligation.

The lender's remedy is foreclosure. Foreclosure is a very serious stain on the credit and will remain for many years. There is generally a belief that a short sale, which is also a form of mortgage forgiveness, is not as serious a blot on the credit as one that would be caused by a foreclosure. A foreclosure process takes a minimum of 4 to 6 months to complete, and is very costly to the lender. At the end, if the property reverts to the lender for its defaulted obligations, the lender must keep, maintain and eventually sell the property via the real estate brokerage market.

In a short sale, the lenders compute their loss and often will accept a sum which will be as low or lower than the amount derived via an REO sale, (a market sale of bank owned foreclosed properties). In a short sale, all obligations of the borrower, including delinquent taxes, are discharged at the closing. The lenders get the net proceeds.

It is imperative to understand, that the borrower-seller of the home, gets NOTHING, only a relief from the mortgage obligation. Thus, the short sale is endorsed by many lenders and they encourage defaulting borrowers to seek this avenue to close the account.

For example, a buyer bought a home for $880,000 and the lender provided 95% as financing. Additionally, the buyer executed a credit line agreement with the same, or another lender, for $150,000 to be used for home improvements. Now the total obligation is $1,030,000.00. In the expanding market of 2004, 2005, it posed little risk to the lenders as the property values continue to increase, soon bringing these loans to standard ratios compliance. This proved to be the type of risks and disaster which plagues today the mortgage and banking industry. The properties, in 2008, regressed in values as much as 30%-40%, bringing this home to about $650,000 value. An equity shortage of $380,000.00.

So the owner wants to bail out. He does not wish to continue to pay on a $1,030,000 mortgage, while the investment value of his home is only worth $650,000.00. What to do??

Legitimately - call the lender, request a lower payment workout and/or a reduction in rates, which normally are granted on the basis of the full mortgage obligation. However, most borrowers are not willing to continue to pay for a house which is worth less than it's obligations.

Foreclosure or a short sale are two other options. Short sales often get approved at the current market value, and the lenders will get less than due them. The credit line will generally be wipes out or settle for a token payments agreed upon by the prime mortgage holder. This is LEGITIMATE, Legal and Proper.

If the borrower WANTS to keep his home, but wishes to have the mortgage reduced to current value. In other words, the borrower is asking the lender to reduce the mortgage to the current value. NO LENDER AS YET, as far as I know, HAS EVER GIVEN AN OWNER A GIFT OF A LOAN DISCOUNT IN ANY AMOUNT!!!

So now, fraudulent actions takes place. The owner finds an agent, who is willing to represent a "Straw Buyer", one who will bid on the home in a short sale purchase, buy the home, and soon after re-deed the property to the original borrower, for a nominal transaction fee. (Bribe). We had enough bogus loans, enough dishonest appraisers, and plenty of greedy lenders, who had engaged in shady real estate, for the past 10 years. It is now time to stand and defend our most important industry against these additional fraudulent activities. The loss of the bank, is our loss, we all end up paying the bank back with our taxes. Please, if you hear or know of these short sale frauds, please report them.