Short Sale Process Complicated by Loan Selling

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The Real Estate Marketing Insider comments on news that short sales in San Diego are encountering roadblocks because big-bank original lenders are selling servicing rights to smaller lenders.

REMI released its opinions on news from North County Times that because banks like Bank of America and Citi are selling servicing rights for mortgages to smaller companies, short sellers in San Diego are having problems finishing their sales. REMI believes this is bad news for the market, as short sales could help pad the already-stretched inventory of homes for sale in Southern California and such roadblocks are slowing market growth in the area.

Short sales are deals in which borrowers who are underwater with their mortgages sell for less than what they owe, absolving themselves of the mortgage. A successful short sale requires the approval of the lender bank. In San Diego County, short sales now make up 29 percent or so of total home resales; this figure does not include numbers of transactions from San Diego vacation rentals.

According to Lily Leung's article in the North County Times, The problem in San Diego is arising because larger banks, especially Bank of America, have been selling servicing rights for “delinquent loans” to smaller companies, who spokesman Richard Simon says “specialize in that type of high-touch servicing.” Since the start of the year, Bank of America has increased their sale of mortgage rights.

If a short seller is in the middle of a sale, and his or her loan is sold to a third party, it means that the seller must start the short-sale process from scratch with the new company. Usually the borrower is notified via mail that his or her loan will be sold in two weeks or so, and then can only wait until the change occurs. Meanwhile, the prospective buyers of the property can lose patience or the terms of the sale can expire; this can disrupt the sale completely, forcing the short seller (who may be delinquent on mortgage payments) back to square one. REMI is concerned that increased difficulty of short sales, which have become more popular in Southern California than foreclosures for distressed homes, may hurt the recovering sales market in Southern California by reducing the amount of homes available for buyers.

The fallout from these increased sales has included loss of cash incentives promised to sellers, which can mean a loss of almost $20,000 after a completed short sale. This can be catastrophic to a recent short seller, who may have been counting on that money for use on real estate broker marketing or other business endeavors. A San Diego realtor advises that prospective short sellers check with their mortgage servicer about their plans for service releases; banks are required to tell borrowers about impending servicing changes. This can help consumers plan accordingly; if they do go forward with a short sale they have an idea of the time frame allotted to close.

The Real Estate Marketing Insider issued a statement surrounding news from San Diego that large mortgage servicers like Bank of America, Citi and Chase are selling rights to delinquent mortgages in greater numbers, and this is causing problems for some distressed borrowers who are trying for short sales. Short sellers must obtain permission from their servicer to execute a short sale, and the change in servicer to a smaller firm means they must start the entire short-sale process over.

The Real Estate Marketing Insider is an online publication bringing news, marketing tips, and analysis to real estate professionals. REMI is based in La Jolla, CA.

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