Last year I predicted that Palo Alto will see more short sales in the future. Well, the future is now so what is happening? There are currently 2 short sales on the market, 5 in escrow, and 6 closed in the last year. This isn't a huge number, but certainly more than we saw in the early part of the century. There's a lot of chatter in the media about how the government is giving banks and homeowners incentives for short sales, and how banks save money by allowing short sales, but does that help the typical Palo Alto underwater seller?
The short answer is no. There is not a lot of help for owners with jumbo mortgages.
The long answer is maybe not.
Here is what I have learned in the last year. It may not be the whole picture, as this world of what happens at the banks, hedge funds, and mortgage insurance companies is not transparent--but I have been involved in short sales and have studied them a lot.
If you are one of the few owners who has one loan then the chances of a successful short sale are much higher. The bank will lose less money than with a foreclosure and will be more inclined to approve your sale. This is assuming you have a verifiable hardship. However, even people with only one loan may run into road blocks if the bank has investors who own pieces of that loan,( frequently hedge funds) and if they don't feel the offer on the house is good enough for them they may derail the sale.
Ok, so what if you have 2 loans, but they are both with the same bank. Again, this is usually easier than some of the other scenarios, but not a guarantee. The bank may be willing, but the investors may not be.
Third scenario, you have 2 loans with 2 different banks. First bank offers second bank 3-10K to allow short sale. The theory is second bank will get nothing if there is a foreclosure. Second bank can have 3 reactions.
3. Not cooperate because they have insurance on the second loan and will get more money if the first bank forecloses and they get paid 25% of their loan from the insurance company as opposed to the 1-5% they are being offered by the first lien holder. In this scenario the first bank is probably not losing too much because borrower has very little equity to begin with since they borrowed on a second or equity line.
4th scenario: In addition to a first and second loan there are other liens against the house including tax or business or personal loan liens. In this case a short sale is almost impossible to accomplish and it is not worth anyone’s time.
So as you can see this is a complicated process and not for the faint at heart. Since many of the loans on Palo Alto homes are jumbo, there are a lot of hedge fund managers out there making decisions about markets in which they may not have enough information. Added to that is the growing resentment against borrowers who are opting for a strategic default or foreclosure because the asset (their home) has depreciated so much they don't feel it is a good investment strategy to hold onto it.
It will be very interesting to see how many attempted short sales actually go through in the next year.
Please, feel free to email me your thoughts and comments. I'd love to hear from you!
For anyone interested, here are some links to articles I've written on short sales and foreclosures:
The Facts About Palo Alto Short Sales and Foreclosures
Don't Get Behind on Your Mortgage in Palo Alto
A Deed in Lieu of Foreclosure
Hardships and Short Sales
When Homeowners Change Their Minds, Landlords Reap the Benefits
A Better Way to Do A Short Sale
Keller Williams Realty