About Lem Marshall

Lem Marshall was counsel to the Virginia Association of REALTORS® for 25 years, and general counsel for 16 years. He has represented several local associations as general counsel as well. In 2000 Lem was appointed by Governor Gilmore to the Virginia Real Estate Board, and has been actively involved in every REB regulatory review and revision since 1989. Lem represents licensees before the Real Estate, Contractors and Real Estate Appraiser Boards, and has conducted over 2000 continuing education programs for REALTORS®, attorneys, and title insurance agents.

Where’s the Inventory? Part 2

So as I ended with on Tuesday, I think the beginning of the end of the current economic situation lies in de-leveraging.

Most of us think of de-leveraging as cutting down on our consumer debt – paying down credit cards, driving an older car to avoid new debt, paying down student debt – and these are all good examples. We as REALTORS®, however, can do little to hasten this kind of necessary de-leveraging, just as we can do little about the economy (at least directly) and next to nothing to encourage investors to dump properties bought at bargain-basement prices and that yield high returns. But we can do something about a huge source of the nation’s overleveraging.

One way to think about the period from 2001 to 2006 is that we borrowed far too much as a nation to purchase assets we thought were good investments but which soon collapsed in value. The leverage I’m talking about is the debt of owners of homes that have depreciated in value to a level below the amount of debt secured by the home. I think the right way to think about this situation is to focus not on the value of the home, but on the amount of the debt. Now, you may think it’s all the same: either the home is worth less than the amount owed, or the amount owed is more than the value of the home. But I will argue that by focusing on the debt, we focus on what we can affect. We cannot immediately change the value of the home. We can help diminish the level of the debt.  The tool is the short sale.

Those of you who are still reading are in for some very good news. I think the stars are aligned to allow us to unlock missing inventory, begin the process of improving mobility, and greatly reduce the debt burdens of millions of homeowners. We won’t turn the economy around by ourselves, but we can help entry into the end game of our national misery.

What has led to this alignment of the stars?

First, the $25 billion lawsuit brought against the largest lenders for their improper foreclosure practices was settled in the spring of 2012. That settlement resulted in an agreement by the lenders to expend approximately $25 billion (most of which they would never have seen any way) to do several important things. They agreed to spend several billion dollars to restructure loans for owners suffering hardships in making their mortgage payments. But most importantly, they agreed to reduce their emphasis on foreclosures and simplify and expedite short sales, a move that is about four years overdue. Here are some of the changes we have seen in the last year, and especially in the last six months:

  • Lenders have simplified the filings for people with genuine hardships.
  • They have agreed to permit sellers to pay short sale experts from the proceeds of the closings (all of which would go to the lender, of course) to manage the approval process, a dizzyingly Byzantine group of protocols and requirements that still govern the process.
  • They have largely adopted the Fannie Mae and Freddie Mac rules regarding payments to subordinate lienholders, greatly reducing the friction among competing lienholders.
  • They have generally agreed to forgive most or all of the deficiencies resulting from the process.
  • They have greatly reduced the instances of dual tracking, so that foreclosures are more regularly abated pending the outcome of the short sale process.
  • They have increased staffing and technology to make the process more manageable for those on both ends of the negotiations.
  • They regularly permit sellers to place on the settlement statements the costs of routine closing obligations, such as preparation of seller closing documents, payment of pest and well and septic inspections and the like, rather than pay them out-of-pocket.

The second important development was the adoption by Fannie and Freddie on November 1 of last year of new procedures that similarly simplify and speed up the short-sale process. Fannie and Freddie are not governed by HAFA and HAMP guidelines, of course, but their new rules replicate many of the advantages of these programs. They also permit sellers to pay for expert assistance and many closing costs on the settlement statement and have committed to large levels of debt forgiveness. They have also dropped their exclusion period (from originating a home loan they will buy or guarantee) to two years.

The atmosphere for short sales has changed so dramatically that, in short, there is simply no longer any reason not to take this kind of listing, or, when working with buyers, not to introduce these properties to your clients if they are otherwise suitable.

There are many reasons this is increasingly the case. First, because of the lingering stigma associated with short sales, and the desire of lenders to clean up their balance sheets, these properties still sell at a substantial discount to otherwise identical properties that are not short sales. Nationally the discount is between 10 and 15% (of course it can vary greatly depending on the condition and location of the property and the degree to which the real estate community shuns short sales), and that seems about right for most of Virginia. Second, the approval time for a professionally managed deal (with an expert involved from the beginning) is typically from 30 to 45 days, so it need not present an obstacle to the typical buyer. In addition, lenders are generally leaving commissions alone (although some will require a modest reduction if the agent is getting both sides of the deal).

There is a great deal more to say about securing a successful short sale, so watch this space for pieces in the very near future offering guidance on how to structure a deal for success, from the contract to the settlement statement to the proper positioning of the seller for approval to the type of assistance you get to obtain approval. For now, your new year should see you at least considering the many advantages of this alignment of the stars. Here’s your missing inventory, and a terrific opportunity.

About Lem Marshall

Lem Marshall was counsel to the Virginia Association of REALTORS® for 25 years, and general counsel for 16 years. He has represented several local associations as general counsel as well. In 2000 Lem was appointed by Governor Gilmore to the Virginia Real Estate Board, and has been actively involved in every REB regulatory review and revision since 1989. Lem represents licensees before the Real Estate, Contractors and Real Estate Appraiser Boards, and has conducted over 2000 continuing education programs for REALTORS®, attorneys, and title insurance agents.