Pam Marron Home Lending

Perception of Short Sellers is Half of Story

Yesterday I had a conversation that hit me to the core, as so many have done over the past 2 years. I spoke with a mortgage banker in California who was calling to find out how to get the foreclosure code corrected on credit for a past short seller. I was elated, thinking here is another person in my industry that “gets it” and wants to help underwater homeowners. We dove into conversation and shared views about real estate markets in California and Florida.

I asked him about strategic defaulters as this was a topic he brought up. “How many strategic defaulters do you deal with?” I asked. His reply, “4 out of 7”.

“How do you know this, do you talk to these people?” I asked.

His reply was the pat answer of a majority of folks that I speak with. ”You can tell because they still have money and they are only late on their mortgage payment.”

That’s the definition and perception of a strategic defaulter to the majority of folks (who are not the underwater homeowners).

I have been in the mortgage business since 1985. For the last two years I have felt differently about short sellers, differently than everyone around me.

What I see is another side of the story.

For years, realtors have told me about clients who brag about how they got away with a short sale when it appears everything is status quo and good. Here’s the reality. Lenders don’t approve a short sale without a hardship.

 Every time I get a call, I have to drill for the gut of why short sellers are selling. This is not offered upfront unless it is obvious, like there is a death or a divorce. People are used to sharing their best attributes to get service, not their hardship. Oftentimes what I learn is not even known by their realtor.

I would wager a huge bet that a very large majority of underwater homeowners who approach a short sale are harder off than anyone, including the press, think. This is not meant to garnish sympathy for these folks. They don’t want it. Many cringe at the humiliating process that they see coming, being labeled as a “strategic defaulter” and dreading that their home sale may affect their neighbors’ home values. I get the call when their lender tells them they can’t give them help until they go delinquent on a mortgage payment.

Here is where the confusing blur between a true short seller and a strategic defaulter lies.

All of us have been brought up by the rule that good credit is needed to get a mortgage to “enter” and own a home. Short sellers are shocked to learn that in order to “exit” that home, they can’t just sell it unless they have the money to pay the difference. In order to sell a negative equity home, an approval must come from the bank. That approval is often tied to a verbalized implication that you must be delinquent on your mortgage in order to get the short sale approval to exit.

Why is this? Two reasons that I can see.

1.      It is an assumption that if you are behind on your mortgage payment, you must have a hardship.

2.      Servicing fees are paid to service delinquent loans

However, the idea that we are told that in order to get help, we need to do something so against what we have been taught… to pay our bills on time and keep good credit… is foreign to the majority of us. This is the reason for an overwhelming number of calls.

And I can attest that the lenders are outright telling these folks to be delinquent. I am on the 3-way calls with them and hear it.

Here’s a “strategic” default: when a homeowner purchases another home knowing they will default on the first home after that additional home closes. (Lenders already see this and guidelines require qualifying for both homes and hefty reserve requirements for both homes.)

I go back to the conversation at the beginning, with the California mortgage banker who perceived the majority of short sellers were “strategic” because they were only late on their mortgage payment. If we report those who pay the mortgage late but stay current on everything else as “strategic defaulters”, additional blame and consequences need to go both ways and placed on the lenders, who have made going delinquent on a mortgage a requirement in order to provide short sale approval. And, this is even after new FHFA short sale guidelines effective 11/1/12 that state FNMA and FHLMC mortgage holders can proceed with a short sale while being current on their mortgage and with a hardship.  

I am not going to get all “social worker” here. I am not a sucker who these folks have convinced with a bad story. If it doesn’t make sense to me, I have no problem telling them there is no way I will be able to convince an underwriter of their plight and why.  

Take another look at what you see, versus what you have read about on strategic defaults. The reason these folks are going delinquent is because this is the option they are given, other than handing over a huge pile of cash they do not have, to exit. Many of them are borrowing from others and their 401k’s to stay current on what they have. Many now have to exit, as they would also do if the home was not underwater.

Perception is only half of the story.

March 20, 2013 by · Leave a Comment

About Pam

Since 1985 as a loan originator, highly experienced with automated loan approvals on DU, LP, and with USDA GUS systems, thorough knowledge and use of FHA loans including 203K rehab, conventional loans including USDA, Homepath and rehab, and VA loans. After 27 years, I STILL love this business!

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