Wednesday, September 16, 2009

Flip side of the housing market coin

To many, short sales seem to be only way of avoiding foreclosure

Express Staff Writer

Part 2 of a two-part series.

Foreclosures in Blaine County are running consistently higher this year than in 2008. Express graphic by Coly McCauley

Three offers were made on the same Hailey house back in June. Though the offers were less than what the homeowners paid, they were willing to take any of them. But three months later, Windermere real estate agent Debra Hall still can't make the sale. Her hands are tied, and the homeowner's lender cinched the knot.

Hall doesn't know when, or even if, the lender will loosen the ropes of restraint.

"I've lost two of the offers simply by virtue of time," she said.

All Hall can do is wait for the bank to grant permission to sell the house at a price less than what's owed. It may never happen, and it's entirely up to the lender, who may just prefer a foreclosure to coming out behind on a loan.

Even though this lender refuses to compromise, some do agree to "short sales," which often work to the advantage of both parties. Homeowners are forgiven their debt and avoid a foreclosure, which would take a heavy toll on their credit for seven years. A short sell hurts credit scores as much, but only for two years, Hall said.

Lenders can shove some quick cash into their pockets. They'll also avoid trudging through the foreclosure process, which can cost $50,000 in legal fees, title fees, appraisal fees and more. Plus, they're rid of a house that they don't have to put back on a soft market.

Wood River Valley real estate agents say they've seen an increase in short sales this past year, especially in Hailey and Bellevue, where most of the foreclosures take place. The Sawtooth Board of Realtors—to which all the valley's real estate agents belong—doesn't track short sales, but President Sonja Huntsman said they account for many recent sales.

According to the National Association of Realtors, nearly one-third of all August home sales nationwide were short sales or foreclosures.

In the valley, distressed homes have fueled a short spurt of summer sales. Depending on how one looks at it, that's either promising or foreboding. Buyers are getting into houses, but only because sellers can't afford to make ends meet.

So far this year, 189 new foreclosures have been reported in the valley, according to Title Manager Peggy Pyle of Sun Valley Title. For the same time period in 2008, only 76 foreclosures were issued. That's two-and-a-half times the foreclosures in one year's time.

Also, foreclosures reached the high mark for the year during the summer with 21, 36 and 29 reported in June, July and August.

"Those are massive numbers," said Curt Chambers, manager of First American Title in Ketchum. "Before this came down, 36 in a year was considered unusual, unheard of in fact."

During the same summer months, sales also reached their highest at 33, 19 and 29.

"That's the story." Chambers said. "Short sales. Foreclosures."

Nationally, foreclosure filings exceeded 300,000 for the sixth straight month in August, piling up to 18 percent higher than a year earlier.

Whether the rising tide of foreclosures will subside is still to be seen, Pyle said.

However, she can offer insight into why so many foreclosures are following through to bank repossession. That wasn't the case a year ago, she said.

"It seemed that in the past, financial institutions were willing to work it out," she said. "Today, people are just walking away from their homes. They can't afford it."

Foreclosure is a three-stage process of lenders' issuing default notices to homeowners, called "pre-foreclosure," foreclosure and finally the bank's repossessing the property. Lenders can decide to refinance with homeowners instead of repossessing, and they often used to, Pyle said.

Chambers said that these days, it doesn't matter that interest rates have dropped to near record lows of 5.08 percent for a 30-year fixed mortgage. Homeowners who could afford to refinance already have.

Those left behind have found that they're stuck with their home because it won't appraise.

"House prices are below now what people owe," he said. "And it's because short sales around them have brought their house's value down. So, it doesn't matter where interest rates are. The Feds could bring them down to zero. That's frustrating. Just another thing to make them say, 'Screw it,' and walk away. That's one more foreclosure. Before you know it, we have 36 in a month."

The only other option is a short sale. But homeowners are at the mercy of lenders. What's more, they're obligated by law to prove that the home's value has dropped, they're in or near default-notice status and have fallen on hard times. Acceptable examples of "hard times" are unemployment, divorce, medical emergency or bankruptcy.

"Proving this is the only way to have it done," Pyle said. "It's not just a quick way out of the property."

Unfortunate as it may sound, many homeowners can easily prove one or a number of these hard-time circumstances, according to Sotheby's real estate agent Sue Engelmann. She's dealt with "a lot" of short sales, as has Debra Hall.

Hall has several short sales in the works. But many agents won't take on short sales because of complex paperwork, difficult lenders, reduced commissions and the chance that an offer may never come.

"That's the first place banks start hammering," she said. "Our commission."

In an effort to encourage real estate agents into short sales, the National Association of Realtors launched a Short Sales and Foreclosure Certification Program in August. The program involves training sessions intended to make the process simpler.

Hall said persuading agents won't fix a thing.

"Lenders are the ones that bog down the process," she said.

President Barack Obama also sees the importance in taking on short sales. The Treasury Department is working on a financial incentive to persuade lenders into approving short sales in lieu of foreclosures. Under what has been called the Foreclosure Alternatives program, lenders would receive $1,000 when a short sale is completed, and the home seller would take in $1,500 in relocation expenses. The program is said to be announced in coming weeks, but it's been a long wait. The Obama administration first announced the program on May 14, but nothing has yet been implemented.

Even if this program comes to fruition and more short sales come to pass, the problem won't be at an end.

These former homeowners will still be in the "hard times" that brought them here, whether it's unemployment, a medical emergency or bankruptcy. And they'll be carrying only a chunk of change in their pocket, looking for a place to call home.

However, in an ocean of default notices and foreclosures, short sales seem to be the long log to cling to.

Trevon Milliard:

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