A short sale is when a homeowner who has negative equity sells their home for less than what they owe on the mortgage (this requires approval from the lender). The lender then forgives the remainder of the debt. For example, a homeowner could owe $200,000 on their mortgage while their home value has declined to $150,000. In a short sale scenario, they may sell the house for $150,000 and the lender forgives $50,000 worth of debt. Although the borrower’s credit will be impacted, the severity is less than if the home was foreclosed upon (in addition, the borrower may owe taxes on the forgiven debt). Typically lenders lose less money on short sales than on foreclosures, which is why they allow them to proceed.
According to data from the California Association of Realtors from March, a whopping 43% of California short sales under contract fall through. A lot of this is due to the extended length of time that it takes to conduct a short sale. Much of this is a result of the large number of short sale requests, and the limited amount of staff that banks have to respond to these requests. For this reason, it can often take 30-6o days before the lender even responds to a short sale request, frustrating both buyers and sellers. Completing a short sale may take six months or more.
A report from the Contra Costa Times suggests that the response time may be improving, which will hopefully facilitate short sales. The speedier short sales are due to increased staffing levels at banks and the Home Affordable Foreclosure Alternatives program (HAFA). HAFA incentivizes lenders and servicers to commit to short sales, and requires them to reply to requests within 45 days. Lender participation in HAFA is increasing, along with response times.
Increasing the efficiency of the short sale process would be hugely beneficial in California (as well as many other states). The HAFA program, which has been relatively ineffective up until now, could be very helpful. We will see what happens.
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