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Bob Khalsa: Short sales noted as foreclosures block buyers

Posted: July 18, 2013 2:00 a.m.
Updated: July 18, 2013 2:00 a.m.

Bob Khalsa

 

Owners selling their home through a short sale would be wise to obtain a letter from their lender that clearly endorses the transaction.

This added step is necessary at least until results of probes by two federal watchdog agencies determine why some short sales are being treated the same as a foreclosure by credit reporting agencies.

Reports are expected soon from the Federal Trade Commission and the Consumer Finance Protection Bureau, which were asked to review a growing number of complaints by consumers who waited the prescribed time and took steps to repair their credit only to be prevented from buying a home because their credit scores showed a foreclosure instead of a short sale.

A hearing held May 7 in Congress found that approximately 2.2 million short sales were concluded over the last few years. It was unknown how many of those transactions have been mis-categorized as a foreclosure, which carries much more severe restrictions when it comes to trying to again purchase a home.

A short sale has severe consequences, too, yet the negative impact of a short sale on an individual’s credit often can be overcome within two to three years. By comparison, the damage wrought by a foreclosure lingers for seven years or longer.

Short sales have grown more prevalent over the last several years simply because all parties are not hurt as much as when a property hurtles toward foreclosure.

A short sale has the lender accepting an offer from a new buyer at a price that is less than the balance of the existing loan on the home. The difference between the agreed upon purchase price and the unpaid loan balance can be forgiven by the lender entirely or in part. Typically, short sales can be concluded faster than a foreclosure, produce a lower loss for the bank, and less damage to a seller’s credit history, while the house stays occupied and adequately maintained.

By contrast, a foreclosure typically generates a larger loss for the lender, can drag on for years, pulls down the resale value of all surrounding property, and leaves a house that has been stripped of everything and too often rendered unlivable, thus generating expensive repairs and renovations that must be completed before the lender can resell it.

Early reports suggested short sales were being misreported because the credit reporting agencies did not have a code to distinguish between a short sale or foreclosure.

At least one of the agencies, Experian, says the coding problem is not theirs, but occurs in the loan underwriting process, which is highly automated with strict underwriting rules.

After the May 7 hearing on Capitol Hill, Sen. Bill Nelson, D-Fla., asked the FTC and CFPB to look into what he called the “disturbing practice” of misidentifying short sales. He wanted to “penalize responsible parties in the mortgage- and credit-reporting industries, if they don’t fix this coding problem within 90 days.”

That deadline will expire soon, yet until the issue is fully resolved, sellers would be wise to insist on proof from lenders when using a short sale.

Otherwise, they might be saddled with a foreclosure label and perhaps locked out of the housing market.

Bob Khalsa is President of the Santa Clarita Valley Division of the Southland Regional Association of Realtors.

David Walker, of Walker Associates, co-authors articles for SRAR. The column represents SRAR’s views and not necessarily those of The Signal. The column contains general information about the real estate market and is not intended to replace advice from your Realtor or other realty related professionals.

 

 

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