What is a short sale??

In a word- a nightmare, in my humble opinion. I guess I am in a unique position since I, at one time, worked at a Bank. Let's see, maybe I can explain it this way..

As an example: A "Short" position is when the house gets an offer that the seller believes reflects his home value, but is less than the money he owes. The reason this could happen are many.

Let's try to vision how this could happen. At one time people took out mortgage with the usual 10% - 20% down. Then as time and appreciation took place their debt was paid by a mortgage payment and their equity grew. Then lo and behold, the people said, we have $50,000 in equity in the house, and we need a new car, so let's borrow the money from the house to pay for the car, and then we can write off the interest on the loan for the car, since we can't on a regular loan. Or maybe it wasn't a car but just they had used credit cards to supplement their income and then found the interest was more than they would pay on a home equity line of credit. Gosh, everyone on TV recommended it!

But this is an easy case to understand. Some are ladden with very sad stories. I know of a person who's daughter needed surgery. He borrowed his equity to pay the medical bills not covered by his health insurance. Now, between the home loan and equity line, he decides to put his home on the market. The market response is that his home is lower than his indebtedness.

So the "nightmare" is for the sellers. Then from what I understand it's been a "nightmare" for the Banks who loaned money in good faith for repayment to return some profit to their repay their investors.

Now comes the buyer, who offers what he believes is market value. The Seller wants to accept the offer, to get out of his financial mess (though he will not be able to purchase property for many years). The Seller goes to the Bank and asks that the Bank be willing to forgive the difference. Well, the Bank isn't in the business of not repaying their investors, and losing money. They are going to want to investigate their customer (the borrower) to make sure that is the only way. If the customer owns other property or other assets, they may say no. All of this takes alot of time!! Now the buyer has a "nightmare" of not knowing if the Bank is going to accept their offer to buy the house they feel is an opportunity.
"
So that's my view of a short sale commonly known as a Nightmare to me. Why for the Realtor? Well, I tried to explain the short sale time line, but the buyer thought I was exagerating, that they thought the sale contingent on Bank approval would be "just a matter of days~ not weeks!".
More likely or not, the Bank will then try to negotiate again the price of the home and of course, the buyer feels the Bank should be listening to the market, and the seller about why they should take less. The Bank will want not to have the property in inventory or a foreclosure since it costs a ton of money, but they also don't want to rush to negotiate their position. But this entire time, I've been following up, working to convince someone of the buyer's position, the Realtor as the listing agent has been trying to explain market value and the book keeper thinks they should get more money or less of a discount of the debt.

It goes round and round.

Have you had your home equity line reduced?

I was talking with an agent who mentioned that she was notified by her Bank that her home equity line had been reduced. So not understanding why, she stopped at the Bank to find she had not done anything wrong, she wasn't deliquent on the pay backs, but that because of the Chicago land decline they had opted to lower her line.

So I sat there, wondering why the Bank would have done that as well as wondering if this was going to be another trend to watch. The Banks seem to be acting more responsible to market conditions. There are people who are "upside" down or owe more in mortgages and 2nd mortgages or home equity lines of credits than their homes have values. At one time, while the market was robust, the Banks felt safe allowing 100% financing, or letting people getting a line of credit against their home equity to pay for colleges, vacations, higher interest loans, or cars.

Today, with foreclosure rates higher than ever imagined and home equity lines are now experiancing defaults as well. Those with high equity lines have seen their home value fall below their total indebtedness - so HELOC (Home Equity Lines of Credit) lenders are taking some drastic steps. Many are freezing lines of credit to the amount already drawn. Others are paring back the maximum value of the line, which is what my friend found out. A few are declaring default far earlier, as allowed by the loan agreement. An occasional missed payment, or a payment coupon returned "undeliverable" by the U.S Postal Service, generates faster loan curtailment.

According to the Chicago Tribune, 1.7% of all home equity lines of credit are experiancing poor back or late pays. This statistic is 500% more than previously experianced. Unlike a mortgage though, lines of credit limits can be altered by the Lender.

I have heard of some people who had "never used" home equity lines, that have written themselves checks just to keep the line open and "used".