RISMEDIA, December 9, 2010—In today’s complex housing market, real estate agents are handling an increasing volume of short sales. While many agents view short sales as a win-win for both homeowner and buyer, they can cause many complications if not properly understood and executed. Since there is no provision in the mortgage agreement for a short sale, the primary lien holder—the mortgage servicer—must approve the homeowner’s request for one. Any additional parties with liens against the property, such as a second mortgage holder, must also approve the request before a short sale can commence. While each short sale scenario is unique and includes numerous variables, the primary benefit to the homeowner is simple—it lets them avoid foreclosure on their credit record at a time when a good credit history is critical for financial and personal reasons.
Homeowners rarely enter into this process on their own—instead they rely on real estate agents, attorneys and/or other vendors to communicate directly with the mortgage servicer. Since each servicer has their own guidelines and requirements, they play the lead role in approving or declining the terms of a short sale.
The Role of MIs in Short Sales
Generally, if the property was purchased with less than a 20% downpayment and required private mortgage insurance (MI), once the servicer determines the sale meets its requirements, they must request the mortgage insurer’s approval of the sale as well. That’s because the MI company is not obligated to pay a claim until a clear property title is acquired via the foreclosure process, and must waive certain coverage requirements each time they approve a short sale to preserve the insured lender’s coverage.
MI companies generally consider short sale requests for two reasons: for loss mitigation purposes and to provide the homeowner with an alternative to a potential foreclosure. With each request, an in-depth review of the following is conducted:
-Purchase amount relative to property value and seller costs, such as real estate commission: To determine if they are reasonable.
-Loan purpose: To determine why the property was originally bought, i.e., as a primary/second home or an investment property.
-Default situation: To determine the reason why a short sale is being requested.
-Homeowner’s financial situation: To assess the homeowner’s employment status, credit report, income and assets, checking account statements and tax returns to make a decision on the short sale.
Homeowner Contribution and Pitfalls
While many short sales occur due to the homeowner’s obvious financial difficulties, some involve “questionable” hardship, where there does not appear to be financial difficulty so severe as to make a financial contribution impossible. Mortgage insurers strive to make their approval terms favorable so a short sale can be finalized, but it’s important that homeowners with questionable hardship—determined by the in-depth review of the homeowner’s personal and financial situation—realize they may be required to participate financially in the workout. This is typically accomplished via a cash contribution, or execution of an unsecured promissory note to repay a reasonable portion of the loss.
Making Short Sales Work
Despite obstacles that can arise, one of the keys to short sale success is the turnaround time it takes to process each short sale request.
As one of the nation’s largest mortgage insurers, Radian is leading the way in expediting this type of workout. The company estimates it will review more than 11,000 short sale requests in 2010, typically responding to each within two business days with an approval or feedback as to what is needed to obtain an approval.
When it comes to short sales, agents are dealing with homeowners and buyers who, quite simply, cannot afford to wait days—or even months—for an answer. As a behind-the-scenes ally, Radian has the experienced resources in place to move quickly, providing immediate feedback to servicers so they can consider and issue their final approval in the fastest time possible. This ensures a win-win for homeowners, buyers, servicers and agents alike.
Brien McMahon is chief franchise officer of Radian Guaranty Inc. More information may be found at www.radian.biz.