Does Your Lender Prefer a ‘SHORT SALE’
So They Can AVOID Another FORECLOSURE?
The national average dollar recovery for a lender who forecloses on a past due loan is 59% of the original loan. For example, if their loan on a property is $300,000 and the lender acquires a property by foreclosure, they recover $177,000 by the time they have resold the property, subtracted all their costs and losses and are able to close the file. They lose an average of 41% or $123,000 on a $300,000 loan.
FHA has a printed guideline that instructs them to accept as low as 82% of the market value of a property if they can secure a short sale buyer and avoid a foreclosure. Fed VA will go as low as 88% on their short sales. Conventional lenders that use FANNY Mae or FREDDIE Mac will go somewhere in between 82% and 88% in their discount for a short sale. At first glance, that seems like a big discount, especially in today’s market where property values are already down as much as 25%. But, when you look at the alternative for the lender, realistically, the short sale saves them over 20%. On our $300,000 loan example that’s a savings of over $60,000. Short sales are not good for the lender but they are a lot better than a foreclosure.
In addition, when a lender has a non performing asset, as loan that is not having any payments coming in, FDIC requires them to book an additional amount of money in their reserves to counter balance that ‘bad loan’. They earn almost no interest on these reserves. This means for every loan that has delinquent payments, they are losing money on interest, are exposed to additional costs and legal fees and they have less money to loan out since they have to increase their reserves. Bad loans are a ‘lose-lose’ for the lender. So, the faster a lender can get a bad loan is paid off, the less they lose and the better off they are in the long run.
There two main causes for concern for the borrower faced with this dilemma. The first concern is the negative impact on the borrower’s credit. But the negative impact from a short sale is only 2 to 3 years compared to 7 to 9 years negative impact if you let your property go to foreclosure. So, a short sale is better for the borrower. The second concern is the possible taxable event for the borrower on the amount of ‘Short’ they have at closing. There is a new law called the Mortgage Relief Act that basically forgives the ‘Short’ as taxable for the borrower if they used the loan to buy the property and/or improve the property. If you took cash out on a refinance and spent it on something other than home improvements, you may have to pay tax on the amount you were ‘Short’ at closing. The information in this report, although thought to be accurate, is not guaranteed. We encourage you to seek professional advice before making any decisions. This information compliments Curtis Irving 03-2009 ©
