The story behind short sales and how their process and how interest rates had an effect on them

Philip A Raices

First, a little history as to why people were forced to do short sales and the reasons behind it all.

About 12 years ago, a majority of subprime mortgages began their slide to an “under water” position, meaning their value was greater than the market value of the financed home! That is what is meant by “under water.”

The percentage of new lower-quality subprime mortgages rose from the historical 8 percent or lower range to approximately 20 percent from 2004 to 2006, with much higher ratios in some parts of the U.S.

A high percentage of these subprime mortgages, over 90 percent in 2006 for example, were adjustable-rate mortgages. These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products.

Further, U.S. households had become increasingly indebted, with the ratio of debt to disposable personal income rising from 77 percent in 1990 to 127 percent at the end of 2007, much of this increase mortgage-related.

My professional and expert opinion is that Alan Greenspan, who was the Fed chair, from Aug. 11, 1987-Jan. 31, 2006, had caused much disruption, due to allowing so many to enter the mortgage market, with variable rate mortgages, providing those, who I believe, couldn’t really afford to purchase a home.

This type of loan had never existed in the past.

Greenspan, along with President George Bush and the Wall Street, benefited greatly, by packaging these loans into multi-million to billion dollar CDO’s (Collaterized Debt Obligations) or mortgage backed securities and sold them off to whomever wanted to purchase, whether investors or even entire countries; thinking that the U.S. economy, at the time was doing well and bulletproof.

Janet Yellen, one of the newly elected Fed governors, played a crucial and critical role in convincing Alan Greenspan that some inflation was good for the economy, as she put it, “a bit of lubrication was good for increasing economic growth; and that was a decision that would haunt Alan Greenspan’s tenure as Fed chair until he was replaced, by Ben S.Benanke in Feb. 1, 2006, lasting until Jan 31, 2014.

However, Greenspan realized too late, the unfortunate error of his decision, and when in December 1996, he came out with the terminology of “irrational exuberance” in the financial markets; but no one was even listening or even cared, because things were flying along and everything appeared in excellent shape, with low unemployment and great interest rates.

However, the bubble was growing, unchecked! As I said earlier, allowing those who could least afford a mortgage to enter the market, just so they could taste and enjoy the “American Dream” even though they didn’t realize that it would only be for a short term until the bubble popped. It had been one of the greatest financial errors that were ever made.

Greenspan pushed interest rates much higher at the beginning of his tenure, when inflation exceeded 5 percent due to strong growlow-interestnterest rates after the great recession of 1988; then causing a recession.

Afterwards, the economy expanded into the longest peacetime expansion in our nation’s history.
The methods to approve a short sale for a homeowner who’s mortgage is under water and is unable to pay on time, is as follows; the owner has to provide all the necessary and required documentation, to show the need to allow the short sale.

They will also do a credit check and also ask for all their assets and liabilities to prove the tenuous position they are in, to approve their “short sale.” If approved by the lender, then, the owner will be allowed to place their home on the market with a knowledgeable experienced brokerage.

When offers come in, even though they may be less than the mortgage amount that is owed; once an offer is accepted then a contract is signed by both parties, with either proof of funds, if being paid outright or a pre-qualification letter from the buyer’s lender.

Then the contract with the method of payment is sent off to the bank holding the mortgage for the short sale approval; whereby the bank will either approve or deny acceptance of the offer.

If approved with a qualified buyer then the closing will be setup. The time could be a few weeks to many months to complete the short sale. It is more complicated than a regular real estate sale and a Broker should have expertise and knowledge in how to start and complete the sale.

Generally speaking, a short sale is more to the homeowners advantage than a foreclosure. In a few instances, if mortgage payments are continued to being on time during a short sale; the seller, could essentially apply for a new mortgage for their next home.

More important, the IRS also has extended the forgiveness of that money saved between the sale price and the mortgage, and for now, is not reportable income, as it used to be a few years ago, where you had to report the savings on your short sale as income. However, nobody could afford to pay the income taxes on the savings, so Congress passed a law, that the savings was no longer subject to income taxes, because if you couldn’t afford your mortgage payments, one could not afford to pay the income taxes either, since it was a burden on the tax payers to come up with the $$$$ for the income taxes, due to their financial condition and that is why they passed the law and have extended it!

That was a little education moment for you and some knowledge that you have now gained, if you really didn’t know how the short sale process worked.
Foreclosure is more serious and has a very huge impact on one’s credit for at least a two year period, whereby I have experienced a situation where we were able to attain a mortgage for a couple, whose income and credit were re-established.

However, today it could take longer to secure a new mortgage if foreclosure had taken place; but every situation is different, so the lender will check out each situation and decide the merits and detriments of the borrowers recent income and credit and debt to income ratio.

Credit is more severely impacted not only by foreclosure, but by the last resort of action, bankruptcy, which would be the last avenue to pursue. If your debts are so much greater than one’s overall income and savings, this will enable you to start fresh all over again. Today, the general rule is one must have a plan within an 18 month period and determine whether to do a Chapter 7, 11 or 13. You can google what those different forms of bankruptcies are; however, exceptions can prevail to the time limitations, and advise one to seek legal advice from a bankruptcy attorney, who specializes in this type of law.

Phil Raices is the owner/broker of Turn Key Real Estate at 7 Bond St. in Great Neck. He has earned the designations as a graduate of the Realtor Institute and is a certified international property specialist. He can be reached by email:Phil@TurnKeyRealEstate.Com or by cell (516) 647-4289 to answer any of your questions or article suggestions or provide you a free comparative market.

Share this Article