Short sales are just one part of a trio of distressed real estate options available to homebuyers in today's real estate market. Their reduced asking price makes them an attractive option, but the long and convoluted sale process has caused many short sale properties to remain on the market unsold.
New legislation regarding short sales is working its way through Congress, and if it becomes law, it could have a truly positive impact on the real estate market. The bill, officially known as the Prompt Decision for Qualification of Short Sale Act of 2011, would shorten the amount of time mortgage lenders have to approve or deny a short sale request, says attorney Matthew Alegi, Chair of the Residential Real Estate Practice Group at Shulman, Rogers, Gandal, Pordy & Ecker, P.A., in Potomac, Md.
Reducing the wait
Under the new law, the deadline for lenders would be 45 days from the time the request is made, he says. "If they don't respond within the 45 days, they are deemed to have accepted that request," he says.
The bill could significantly improve the real estate market in the near future by allowing struggling homeowners to sell more quickly while increasing home sales overall. "The goal is to help consumers, borrowers and ultimately taxpayers by speeding up the short sale process," he says.
According to Alegi, short sale requests can often go unanswered for six months or more. "By then, the buyer could have moved on," he says. "A 45-day notification period would be a significant improvement."
Issues remain, questions still unanswered
However, there are several issues with the bill that still need to be addressed, Alegi says. For instance, it's not entirely clear that everyone will agree on when a borrower's information package is officially "received," he says.
One of the reasons short sales take a long time before any decision is made--positive or negative--is the loan servicer often doesn't receive the complete application file in a timely manner, says Steven Bocca, a senior mortgage consultant with Element Funding in Atlanta, Ga.
The requirements for a short sale request can be time-consuming, he says. As a borrower, you often have to provide detailed income information, such as past tax returns, W-2s and bank statements, he says.
In addition, you likely have to provide proof that a short sale is necessary. "A lender may require you to show that you are behind on your home loan payments, prove you have to relocate for work, or prove through an independent appraisal that your home is a certain percentage below what you owe on it," says Bocca.
Another potential issue with the legislation is the company which services the home loan (and would receive the request) may not have the ultimate authority to approve a short sale, says Alegi.
Many mortgage loans are private-label products, which are backed by private investors, he says. The true decision maker may be a trustee who has a responsibility to investors, he says. It would be difficult for them to get quick approval for a short sale that would only earn investors pennies on the dollar, he says.
As a result of these potential issues, experts say it's possible that if the law passes, mortgage lenders could respond to short sale requests with "knee-jerk" denials, just so they can say that they are in compliance with the Short Sale Act, Bocca says.
But eventually, lenders would have to find a way to make sure they're in compliance with the spirit of the law, he says. "Banks will be cautious not to miss any steps and open themselves up to litigation," says Bocca. This means reviewing applications carefully and setting up internal procedures to help them make decisions faster, he says.
Revitalizing the market
If these issues can be resolved, there's a decent chance the bill could pass, Bocca says. However, the first few months could prove difficult for the market. "There may be a sudden spike in the number of short sales on the market, which would add more housing supply to the marketplace and depress current home values," he says.
But the long-term view is more positive, Mortgage lenders would be motivated to make faster short sale decisions, which could spur more stable, long-term activity in the market. "This would ultimately allow homeowners to be in a better position to sell their homes and move on with their lives," Bocca says.