short sales - the iceberg analogy

Short SalesWhy won't your lender approve your

short sale?

The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Before proceeding in reliance upon this or any other general description of law, consult with an attorney.

Copyright 2010 Nash Law Firm 763.862.6100 www.nash-law.com

Presented by:

The Nash Law Firm

Why Won't The Lender Say Yes?

Many borrowers go through the short sale process only to find that their lender:

• Won't return calls• Routinely loses your documents• Won't agree to a sales price that is the best you can get for

the property• Won't release them from future liability even though if the short sale

falls through they will not have future liability• Is demanding money from them that they don't have

IT MAKES NO SENSE! WHY IS THIS HAPPENING?


The Iceberg Analogy:It's Not What You Can See, It's What You Can't See

That Controls The Outcome

Only one-third of an iceberg is visible above the water line but the two-thirds under the water is what matters the most. While a ship probably won't hit the part of the iceberg that can be seen, the two thirds of the iceberg that can't be observed can easily sink the ship.

A lender in the short sale process is like the iceberg, what you can't see often has more impact on the transaction than what you can see. While it may appear from what you know that the short sale appears to be in the best interests of the lender, the facts that you are unaware of often can kill the deal.


The Tip of the Iceberg-What we can see in a short sale-

The following are facts that the borrower can see:

• Governmental and lender programs designed to help borrowers

• Lender Announcements• The heavy costs of

foreclosures to the lender • The fair market value of the

borrowers property


Government & Lender Programs

Many programs designed to help millions of homeowners have been introduced over the last three years. In each case all of the major lenders signed on to these programs with great fanfare stating that they wanted to work with homeowners to help them deal with the issues facing them.

Various Foreclosure Prevention Programs

Hope Now

Project Lifeline

Homes for America

Homes Affordable Modification Program (HAMP)

Homes Affordable Foreclosure Alternatives (HAFA)


Lender Promises

Representatives of the major lenders have appeared before congressional meetings and made public statements declaring their intentions to be more responsive to their borrowers and pledging to work with them to either save their homes or make it easier to sell a home by a short sale.

False hope: Lenders promises:

• We will work with you• We will be responsive• You don't have to be in default and

we will still work with you• We have improved our short sale

systems

Unfortunately, they have to continue to make these promises because they haven't been able to make good on their past promises.


The Heavy Costs of Foreclosure

Foreclosures cost the lender time and money. In addition, we know that when a lender becomes the owner of the property, the property value falls even further and their holding costs continue to mount.


We Have A Great Purchase Agreement

The property has been on the market for months, you have finally gotten a purchase agreement which will clearly net the lender more money than if the short sale is denied and the property ultimately is lost through foreclosure.

Time is running out. The period of redemption is about to expire or the buyer is going to backout of the purchase - surely, the lender won't let this great deal die.


What You Can't See Can Sink The Ship

What is the two thirds of the iceberg that you can't see?


What's Below The Waterline?


Who Owns The Mortgage?

The lender that the borrower sends their mortgage payment to is not always the actual owner of the mortgage. If they do not own the mortgage they are acting as a "servicer" for the true owner of the mortgage.

The mortgage could be owned by another lender, Fannie Mae, Freddie Mac, HUD or it may have been a part of a large number of mortgages that were sold in a block to investors.

If they don't own the mortgage, the lender (servicer) will not have complete freedom to agree to a short sale.


Servicer Conflicts

Many allege that servicers have a number of conflicts that discourage them from cooperating in a short sale.

• A successful short sale stops their servicing fees

• Servicer's often own junior liens they do not want to recognize a loss on

The servicer's also have a fear of lawsuits from the owners of the mortgage if they change the terms of the loan.


Investor Requirements

When servicing a mortgage, the servicer must follow the investor guidelines contained in their contract with the owners/investors of the loan or go to them for approval.

Investor may require:

• Borrower to be delinquent for predetermined number of days

• Defined hardship

• Monthly cash flow cap

• Short and long term savings caps


Mortgage Insurance

A lender may have mortgage insurance which provides a better payoff to the lender than any short sale will provide.

If this is the case, the lender has no incentive to approve any short sale and every incentive to complete the foreclosure so they can make the insurance claim.


The Unpredictability of Lenders

Because we are unable to see all of the lender issues found below the waterline, it is difficult, if not impossible to predict what a lender will or will not do in a short sale even when dealing with a short sale that looks identical to one that sailed through the process with the same lender.

Are they unresponsive because they are inefficient? Is the negotiator simply indifferent, burned out and/or poorly trained?

All of these factors may be true but, ultimately, if the lenders truly wanted to efficiently process short sales they could. If they are unresponsive it is because they don't see the value of an efficient short sale process. The factors that we can't see are more important to them than the factors that we can see.


The IcebergAbove and below the waterline

The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Before proceeding in reliance upon this or any other general description of law, consult with an attorney.


short sales - the iceberg analogy

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