Several changes in the law promise to expedite these transactions and give your clients more leeway

By Roger Cruzen

After 25 years in the real estate business, Leonard Bustos, a broker with Park Place Properties, La Quinta, knew that negotiating a short sale could be tricky. Even so, he expected a response when he faxed a thick stack of documents to Washington Mutual Bank (WaMu) in early December 2007. He had spent hours preparing the documents—an offer on behalf of a seller who owed about $70,000 more than his Coachella Valley golf property was worth.

Bustos got the answer—after faxing the whole package some 50 times and investing an estimated 400 hours over the 12 months it took to finalize a deal with the troubled lender, by now part of JPMorgan Chase.

His is a modern-day horror story and a cautionary tale for REALTORS® everywhere who are trying their best to make a living by facilitating short sales and representing banks in the sale of REO properties.

“My advice is to avoid short sales entirely, because the lenders are not dealing in good faith,” says a bitter Bustos. “I’m not going to waste any more of my time, and I tell my clients not to waste their time. REOs are a lot easier.”

Fewer Short Sale Horror Stories?

What can you do to improve your short sale and REO transaction batting average in 2009? And what factors may influence your ability to complete these transactions in the months ahead, given that they will dominate in 2009?

Some observers blame these horror stories on uncertainty—over just how far home prices will drop, whether the federal government will bail out more lenders, and the extent to which various foreclosure prevention programs actually will help homeowners stay in their homes. They’ll tell you the last thing banks want to do is to foreclose on a home they will end up selling for dimes on the dollar.

That banks were ill-prepared to handle the sudden onslaught of loan defaults and foreclosures is an understatement. The combination of panicked homeowners, lack of a standardized process, short-staffed loss mitigation departments, inexperienced REALTORS®, and falling home values resulted in chaos during 2008.

“There was no curve—it was a big boom,” says Kathy Jeffers-Volk of Coldwell Banker’s Corporate REO division, who was with Countrywide in the early 1990s. “But back then it wasn’t 400 one month and 4,000 the next, as it was this time.”

“Did we have some growing pains? Certainly,” admits David Knight, vice president of Default and Retention Operations for Wells Fargo Home Mortgage. “Last year at this time, as an industry, we were still grappling with having enough people to answer phones and enough negotiators to respond to offers.”

Wells Fargo, he says, now has the processes and people in place to more effectively manage troubled loans via a streamlined short sales process and by spelling out qualifications and expectations for agents certified to handle sales of REO assets through a subsidiary called Premiere Asset Services. “We’ve gone to extremes to make sure we are providing really timely responses, and we’re beating our own timeline when everything happens the way it should,” Knight reports.

The key is establishing direct communication between the agent, homeowner, and Wells Fargo negotiator within eight days of receiving an application, quickly performing a property valuation, and identifying mortgage insurance or other issues, such as liens—before any offers from buyers are entertained. The result: Wells Fargo says it can handle five times as many short sales as a year ago.

Short Sales: What’s Changed

With federal and state governments and regulators increasingly calling the shots, banks are scouring their portfolios looking for borrowers in trouble or on the verge of it. The hope for 2009 is that lower interest rates will allow many homeowners to refinance or negotiate a loan modification. Failing that, a short sale becomes an option.

The popularity of short sales has grown because, in certain cases, a seller no longer is liable for paying taxes on the difference between the amount owed on the loan and the short sale price.

“Historically, people ran from a short sale, because until this year [2008] there was a taxable consequence,” says Ronald Bergum, chief production officer with Irvine-based Prospect Mortgage and formerly a top executive at IndyMac and American Home Mortgage. “That [eliminating the taxable consequences] changed the game right there.”

Short sales are a cheaper option than foreclosing on a property and selling it as an REO. “We save 10 to 15 percent in loss mitigation [costs] by doing a short sale,” says Bergum. “It’s a win-win for everybody. The issue lenders have with short sales is an understanding of what the real value of the property is. If the lender doesn’t have confidence that the valuation is real, a short sale is probably going to fail.”

That many troubled loans are owned by multiple institutions further muddies negotiations, lengthens the process, and causes buyers (and agents) to lose interest.

Bergum is among a number of industry leaders who advocate the development of a standard process for handling short sales. So is REALTOR® and short sales educator Ron Garber, whose business, ShortSalePlan, helps agents coordinate short sales in exchange for a percentage fee. Both believe a “prequalification” process that could speed lender approval of short sales is on the horizon in 2009.

At press time, there were hints that lenders are becoming preemptive: Fannie Mae announced it would provide early workouts to homeowners facing financial difficulties before they are distressed. In addition, JPMorgan Chase and Bank of America have announced similar intentions.

Managing Your Assets (and the Bank’s Asset Manager)

Everyone’s goal is to stem the tide of foreclosures, yet no one is sure what combination of bailouts, efforts to stimulate lending, foreclosure holidays, and state legislation will do the trick.

But when a loan can’t be refinanced or modified, or the property sold via short sale, the bank usually ends up foreclosing. While short sales can take months to negotiate, banks are anxious to move their REO properties and willing to hire qualified REALTORS® to do so.

Experts say selling REOs is all about managing assets—yours and the bank’s. Asset managers handle between 150 and 250 cases at a time and may close 40 to 50 properties a month, according to Jeffers-Volk, a former president of REOMAC®, an REO industry trade group. “It’s kind of like playing three-dimensional chess,” she says.

But getting into the game can be tricky.

“Lenders do not have time to train you, which is why we decided to train agents,” she explains. “Each lender has different procedures, and it is very important that you know your client’s procedures.”

REALTORS® also may have to train their bank asset manager, who may or may not have real estate sales experience.

“The number one thing an REO agent needs to recognize is that you can’t assume the guy [asset manager] back in the Midwest knows the specifics of how agents in California write contracts,” says REALTOR® Carlos Aguilar, a former asset manager for GMAC who now sells bank REOs with Axia Real Estate Group in San Diego. Aguilar’s firm has seven people who work exclusively on REOs, and they currently manage 100-plus assets. They have been closing 20 to 25 deals a month. “You can do well, but you’re not going to get rich,” notes Aguilar.

And everyone needs to keep a close eye on legislative changes and the client’s evolving financial situation, advises Beaumont REALTOR® Joan Marie Patsky, GRI, broker/owner of Realty World Specialists, Beaumont.

In January 2008, Patsky listed the home of a senior whose medical bills forced her to sell. After agreeing to reduce the home’s price several times, the seller admitted that she had filed for bankruptcy, and stopped making her mortgage payments in May, and that her lender was pursuing foreclosure.

In July, shortly after Governor Arnold Schwarzenegger signed SB 1137 (Perata), Patsky recalled she had received a bulletin from C.A.R. that explained, in part, that lenders were now required to contact the homeowner and explore loan modification options before initiating a foreclosure action. The bill provided, and a call to the C.A.R. Member Legal Hotline confirmed, that Patsky could negotiate with the lender on her client’s behalf by obtaining a consent letter signed by the client. That put Patsky in the position to negotiate with the lender and buy some time to explore a variety of solutions, including a short sale, before she found a buyer and negotiated a closing in late September, just after the bankruptcy was discharged.

In a business that is all about negotiating a successful transaction within a prescribed timeframe, SB 1137 provided the tools she needed to explore all options and resolve a complex set of issues to everyone’s satisfaction.

“SB 1137 has been a real blessing, because it caused the lenders to stop and think, ‘Why don’t we see if we can work this through?’” Patsky concludes. But, as Patsky learned, closing a foreclosure transaction and doing the right thing for a client don’t ensure that months of work result in a commensurate payday.

In the end, Patsky sliced her commission to get the deal done for her client before a bank-imposed deadline. “At times it felt like it would have been easier to just make the house payment, but I couldn’t do that,” she sighs. “My seller said to me, ‘You must be making about $5 an hour by now,’ and she wasn’t far from wrong.”

Mortgage Workout Options

* C.A.R. has compiled a chart detailing existing mortgage workout programs from leading lenders. Find the document at www.car.org/economics/.

Roger Cruzen is a freelance writer.