Can anyone demonstrate, unambiguously, how a short sale benefits a distressed homeowner more than a foreclosure?
Submitted by bjc21 on Mon, 05/05/2008 - 2:55pm.
An attorney offers the opinion that once the NOD is filed, the credit damage is done. He further opines that with hundreds of thousands of foreclosures, there has never been a better time to for a homeowner to walk away. The credit damage bogeyman is a scare tactic promulgated by the lending industry which, by the way, is mostly responsible for this mess. Foreclosures are happening to doctors, real estate brokers, and, yes, attorneys. These homeowners are not deadbeats or bums; they are reputable citizens in trouble. What? Says the attorney, is the lending industry going to refuse loans to these people when they show up in a couple of years with 20% down. The lending industry needs these people to saddle with more loans. The attorney further offers this accusation: the folks most benefiting from short sales are real estate agents and lenders. Homeowners receive no demonstrable benefit from a short sale vs. foreclosure.
Comments:
That attorney is frankly nuts, and feel free to refer them to me to debate it. Let's start off with the very simple fact that if the 1st mortgage forecloses the borrower remains liable for the 2nd mortgage. Yes, the 2nd loses their security interest in the property, but they have not given up any rights to collect the debt from the borrower themselves.
And in states that allow deficiency judgements even on the foreclosed loan a shortsale can save the borrower from years of debt collectors and potentially even bankruptcy.
By negotiating a shortsale, the borrower can be confident that this is completely behind them aside from a lower credit rating.
That said I agree that there is a lot of fear mongering and misinformation out there and that some of it is an attempt to scare homeowners into making bad decisions - providing balance to that is one of the primary reasons for this site. I also don't think having a foreclosure is catastrophic -- but I firmly believe that keeping a seat at the table and trying to get a short sale done is in the borrowers best interest.
Counter arguments anyone???
Per MyFico.com's website: They state that a short sale, deed in lieu, or foreclosure all have the same effect on credit scores.
MyFico is owned by Fair Isaac, the inventors of credit scoring.
So many agents and owners believe that the short sale will go easier on their credit scores and make it easier to buy a house again sooner.
The fact is, they do not. A short sale or foreclosed owner will still need to wait the 5 year period after foreclosure to buy a home using a FNMA loan.
As for the 2nd trust deed holder coming back on you, I am not qualified to answer other than the fact that many who have lost their homes have done so because of a major illness. It is important to seek the advice of an attorney and CPA as a bankruptcy might be the very best thing for a person. The Fresh Start can make it possible for a person to provide for their own retirement.
Hi Mary - Thank you so much for contributing.
I think that saying a short-sale, foreclosure or deed-in-lieu all have the same affect is an over simplification, based on what I've gleaned from myfico.com. I think what the moderator was trying to say was that in all three cases it will show as seriously derogatory, and ultimately as settled for less the amount due. But note that if you are doing a short sale or deed-in-lieu this can be negotiated - it is the lenders choice as what to report to the credit bureau. Similarly the right for the lender to pursue a deficiency judgement can be negotiated (when the lender has the right to pursue one). Based on those two facts it is ALWAYS better for the homeowner to remain at the table and try to get a short sale done.
Second, the vast majority of foreclosures have nothing to do with illness at the moment. And in situations where negative equity and perhaps an ARM reset are the only reason for foreclosure folks really should do everything they can to avoid BK. A BK is ABSOLUTELY worse for your credit than a foreclosure, just by the simple fact it stays with you 10 years instead of 7.
Sean -
Here is another benefit of completing a Short Sale vs Foreclosure. In a memo from Fannie Mae - see the link below, dated, 6/25/2008 - it basically says that Fannie Mae will lend to someone who has had a short sale (pre-foreclosure) after 2 years versus 5 years if someone has had a foreclosure. This is really good news for homeowners who have a tough situation with their housing who choose a Short Sale vs Foreclosure.
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf
BOB
Great find Bob, thanks for posting it!!! Yet another reason for Realtors to help folks get a short sale done -- they'll have a repeat customer back in just 2 years (though hopefully in a property they can afford).
SEAN - I LIKE YOUR STYLE..
GREAT FIND.. ON THE FANNIE MAE PDF..
I SEE NOTHING ELSE FROM ATTY.. ??
KEEP IT COMING..
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