Selling Short: Avoiding Foreclosure the Hard Way

Avoiding foreclosure is a good thing, right? The mortgage-holders save money; the homeowner saves face and maybe even some credit rating points; and the neighborhood escapes the stigma that foreclosure brings.

The Obama administration has even encouraged lenders to avoid foreclosing on financially distressed homeowners by allowing short sales – meaning the lender accepts less for a property than the borrower owes.

Lenders haven’t exactly jumped in with both feet, as the numbers show. From July through September 2011, foreclosures in Cuyahoga, Lake, Lorain, Medina, Ashtabula, Geauga and Summit counties outnumbered short sales about 24 to 1.

There were 478 short sales during that period, compared to 11,744 auctions, according to the Northern Ohio Regional Multiple Listing Service.

Nationally, 30 percent of sales during that same period were short sales.

“That’s likely the high-water mark,” said Carl DeMusz, CEO of the listing services. “It’s likely going down.”

Howard Hanna real estate agent Cathy LeSueur is perplexed by the reluctance of mortgage-holders to embrace short sales.

“The banks are ridiculous,” she said. “They’ll reject the short sale, foreclose, let a house sit empty for two years and then sell it for far less than they would have gotten in a short sale.”
    
Furthermore, she said, “The banks know they’re stupid. They’re playing some kind of game on paper.”

Despite the grim odds, beleaguered homeowners aren’t giving up on the idea: people like septuagenarians Lorraine and Ben Eddy. (The names are pseudonyms; the couple prefer to remain anonymous.)

The Eddys have been working on a short sale of their home of 50 years since their agent, Paul Blumberg of Howard Hanna, delivered the bad news: According to his market analysis, the 87-year-old house’s market value had plummeted from $160,000 – its county appraisal before the housing market crashed in 2007-- to $49,900.
   
And since they’d used their home equity over the years for big bills, home improvements and to help their children, they owed $130,000, an equation that forced them under water.

The couple was, in a word, flabbergasted.
     
“The house was valued decently,” Lorraine Eddy said softly, “but when the market blew up, it plummeted to something really indecent.”
      
A buyer materialized about five weeks later – no surprise since the lovingly maintained two-family home was a deal. And as August began, seeking a short sale became Lorraine Eddy’s full-time job. And she’s done it with the professional precision she’d perfected during her career, carefully logging all contact with the bank.
     
But the bank didn’t make it easy.

Eddy called their lender’s local office, but was told they didn’t know anything about short sales. She called the bank’s corporate office in Columbus, and was referred to “someone in loss mitigation.” She asked for short sale information and received a mortgage default package.
  
“I told them I didn’t want to default.  I wanted to sell. And finally someone told me to talk to the short-sale department.”  

Learning that the default packet doubled for the short sale packet, Eddy dutifully completed the requirements – supplying income tax returns for two years and two recent bank statements; reporting their monthly budget; writing a letter explaining why it would be a hardship to retain their home – and sent the packet back to the bank.

They could no longer maintain their home, she wrote, because they couldn’t afford a handyman to do everything her husband, now in his late 70s, had once done himself.
     
Meanwhile, she kept paying the mortgage.

“I couldn’t not pay my mortgage,” she said.  
     
In October a corporate employee was assigned to handle the Eddy’s house, and in early November, the contact person asked Eddy to re-file a paper because it had become outdated.
     
“The contract is set to close in December, but we don’t know if the bank will accept it,” she said. “We’re afraid to ask for fear of aggravating them. We keep waiting for the process to work.”

They may have a long wait on their hands.
    
It can take up to a year for a short sale to go through, Blumberg said. He’s handled about a dozen short sales a year since the housing crash.

“These can be complicated difficult deals, depending on how many liens the house has,” he said.

Eddy said her husband is fed up with the process, but he’s willing to work with the system a little longer.

“The bank would be crazy not to accept the short sale,” she said. “It’s their chance to get some money instead of just a big empty house.”