Short Sale Expert Weighs In

Posted by: Peter Coy on June 12, 2008

It’s not every day that we get a CEO answering questions from readers, so when one does I like to give it a little extra attention. That said, here’s a comment that was submitted by Alexander Paykin, CEO of Option Next. He wrote in awhile ago commenting on The New Exit Strategy: A short sale but his contribution got lost in our voluminous inbox. Obviously Mr. Paykin expects to drum up some business by writing to Hot Property, but we don’t mind it when people do that as long as they provide some genuine info along with the implicit sales pitch.

Here’s his comment:

All right, I am the President & C.E.O. of Option Next, the leader in short sales mitigations, and it’s time to set the record straight. So by popular demand (OK, so maybe just at the request of ‘D’), here are some answers then:

Cass: On May 9th, you asked about why the bank might reject your short-sale offer, even at ‘full-price’. The answer is that the full asking price that the realtor listed the property at is not the same as everything owed on the property. It is simply the price the realtor listed the property at, figuring he would find someone to put in contract at that price, and then hope that the bank approves it… It reality, that price is probably much lower (as much as 40 or 50 percent) than what’s owed on the property, and the bank did not want to take that big a loss. If your offer is anything short of fair market value for the property, the bank may choose to wait and see if it can get more at the auction. You have 2 choices: If you’re willing to pay more, make a higher offer, if not, look for a different property. Also, when considering buying a short-sale property, ask the realtor if it’s already approved for the short payoff. If it is, you shouldn’t have to wait for anything. If it’s not, ask the realtor if they plan on mitigating it themselves, or handing it over to a professional loss mitigation company. If the realtor says they will do it themselves, just walk away. Realtors rarely get a good short sale approved when compared to good mitigation companies, and most of them will be a waste of your time…

Dee: Generally, having a PMI will discourage the bank from bothering to negotiate a short sale. After all, if their losses are insured, they can just wait until the thing closes, and have the PMI pay most of the difference. However, some PMI companies are now requiring the banks to take reasonable short sales offers in an effort to mitigate damages. So the answer is, it might go either way. Depends on your bank and PMI company…

RAIMIS: You didn’t really have a question, but to comment on what you said, it will stay on your record for 6 years, but a competent loss mitigation company should be able to refer you to a credit repair company which can make it go away much sooner…

Yun Wang: Paying the seller outside of closing is highly illegal! The entire concept of the short sale requires that the bank take all of the proceeds of the sale and the seller walk away with nothing. If you pay the seller separately, not only is the short sale fraudulent, but you are exposing yourself to many additional liabilities (i.e. tax liabilities, as the 75k you give the homeowner will not be reportable as a house purchase). Whatever you do, don’t pay the seller separately in a short-sale!

Kristen Canova: The effect on your credit will not be too severe. You can expect a 10 to 50 point drop in your score, which can be wiped away in a credit repair. You should have no trouble renting, as long as you keep your rent amount with your means…

Janine: Homeowners’ Association fees are independent of your mortgage and are technically your responsibility. However, if you are completely unable to pay them, the bank may choose to pay them out of the short sale proceeds, simply to make the deal go through. Pay them if you can…

Patti: A short sale negotiation can be instituted at any time, as long as the homeowner is still the owner of record. In other words, a short sale can be approved and completed 5 minutes before the scheduled auction. The more time you have the better, but it’s almost never too late to try. Also, a homeowner can begin the short sale process before they are even in default. Banks allow a loss mitigation company to negotiate a short sale if the homeowner will soon be unable to make his mortgage payments. You don’t have to wait until you can’t afford your bills!

CAROL: If you do a short sale, as long as the property was your primary residence, the bank will not go after you for the difference. In the event of a foreclosure, it depends on the state, many allowing them to go after you personally… Short selling is almost always a better solution than foreclosing, but if you do choose foreclosure, consult a good attorney in your area…

Danny Haws: The advantages to buying a short sale are few. In fact, there is only one. The Price! The disadvantages are that it is a slow process and that after you spend time and possibly money (attorney’s fees, inspections, etc.), the bank may reject your short sale offer and you have to start from scratch. Also, beware of the really cheap deals, they usually have a lot of damage and require extensive repair…

Kathy: If you can’t afford the promissory note for the difference, Don’t Sign It! Tell the bank the situation. By that, I mean, draft a full letter of explanation, explaining your hardship in detail and illustrating why you can’t possibly make such a payment. Be as descriptive as possible and appeal to their compassion and humanity. Remember, the bank mitigators are people too, and they want to be able to sleep at night. If they realize how much of a hardship it is for you, they will try to work out some better alternatives, one of which may quite likely be a complete write-off of the difference owed…

Suzanne: The first step is to get a qualified loss mitigation company on your side. This is at no cost to you! The loss mitigation company should then refer you to a realtor who is well qualified in the short sale field. The realtor will list and market your property at the short sale discounted price, and the loss mitigators will negotiate with the bank on your behalf. You don’t have to pay a cent for all this work, as it gets paid for by the bank as the real estate commission. That’s pretty much it… As for the likeliness of approval, considering you need a drop of about 25-30%, I am reasonably confident that a good loss mitigation company can get it done. As for the effect on your credit: yes it’s a black mark, but no, it’s not that bad. Considering your current credit score, as long as you make all of your other payments on time, you should have no difficulty with buying another house or getting approved for other credit.

Sam_Seek: It doesn’t matter where your cash is. You have to disclose all of your assets to the bank, and if you have too much in liquid assets, they simply won’t approve the short sale unless you pay some of the difference. Keep in mind, as long as it’s just some modest savings, the banks will not go after it…

Heather: No you can’t sue the bank. It’s their choice whether to accept an offer for less than you owe. They are never obligated to accept anything other than a full payoff. However, if your realtor did the negotiations for short sale on his own, and did not consult a professional loss mitigation company, you may have a case against the realtor. The realtor owes you a fiduciary duty, and unless the realtor is HIGHLY qualified in loss mitigation, part of their duty is the refer you to someone who CAN help, and not just to try blindly. Whether you can sue your realtor will depend on this: 1. How experienced and educated was your realtor when it comes to short sale loss mitigation? 2. Did the realtor conduct the mitigation properly? If you need some help in figuring out the answers to these questions, don’t hesitate to call me, I’ll explain it in more detail…

Esmi: Sounds like a short sale is your best bet. Don’t worry too much about the credit consequences, they won’t be too sever. Considering the other options are to turn in the deed in lieu of foreclosure (a terrible hit on your credit), or to foreclose (even worse). A short sale should not affect your credit too poorly, especially since the property wouldn’t be shorted by all that much (10-20%). If you are going to go with a short sale, don’t spend your money fixing anything! Banks approve short sales faster when a property is in poor condition, so don’t spend the few bucks you have left fixing it up…

Kelly: Well, your question is a bit lopsided. Yes, you put down money, paid every month, etc. However, the bank gave you a loan. They put their money down, with the understanding that you’d give it back with interest. Is it right that you’re telling them you won’t? Right has little to do with it. The fact is, it is money you owe. You can refuse to sign the promissory note, and they may approve the short sale without it, however, this is at their option, and if you have the money to pay them back, then they’ll see no reason why they should just give up on the loan they gave you. Remember, every problem has two sides to it. I’d consult a good loss mitigation company if I were you, since a good one can often get the bank to let go of the promissory note idea…

Well ladies and gentlemen, this is all the time I have for today’s answer session. I believe I’ve covered every question asked between now and April 7th. If you have a question, contact me at apaykin@optionnext.com, call me at 888-311-NEXT(6398) x.801, or just go to www.optionnext.com, and drop us a line. We attempt to answer as many questions as we can, and are in the business of providing short-sale, short-refi, loan modification and other foreclosure alternatives by negotiating a fair and reasonable compromise with your bank…

Alexander Paykin, J.D.
President & C.E.O.
Option Next, Inc.
www.optionnext.com

Reader Comments

Brian Kurtz

June 15, 2008 11:37 PM

Lots of accurate info here. Only thing that I saw that was not in line with what I've experienced in the real world of negotiating short sales is that there are some lenders that will NOT waive their right to pursue for the negative balance...even on a primary residence.

What's worse is that while the BANK may not go after the homeowner for the difference, and may put that in writing, if there is mortgage insurance on the property, the MI company may go after the homeowner if they had to payout to cover the loss to the lender.

I'll be going over things like this on a future episode of The Short Sale Show at http://www.ShortSaleShow.com

Scambuster

June 18, 2008 1:20 PM

Brian Kurtz is incorrect. The MI will get nothing from the homeowner. Insurance business is in the business of insuring other people's risk. Insurance premium pays mortgage insurer for taking that risk. If the homeowner has to reimburse the MI for losses, the MI assumed no risk and everyone would start asking what's the premium for. May I suggest Mr. Kurtz explan his wonderful reasoning in court of law as to why the homeowner must indemnify the MI for losses. Despite his shameless plug for his http://www.ShortSaleShow.com under the guise of BW blog, Mr. Kurtz has just failed to show a good accounting for himself.

Brian Kurtz

June 21, 2008 11:53 AM

On this particular subject I speak from personal experience. I've worked two short sales (one with CitiMortgage and one with EMC) where the Mortgage Insurance company, not the mortgage company itself, made the ultimatum that the short sale would only be approved if the borrower signed an unsecured promissory note for a specified percentage of the loss. They also informed the homeowner that if they said no to the deal and the home went through foreclosure, they would sue for any loss that they incurred when they had to reimburse the mortgage company.

Both of these scenarios were with Radian as the MI company. I've not experienced the same type of aggressive behavior with MGIC or any of the other MI companies.

Is it possible that they were bluffing and would have made no motion to pursue after a foreclosure? Possibly...but we'll never know. The terms for approving the short sale have always been favorable with the borrower only being required to reassume 20-25% of the negative amount due recast at a 0% rate.

The point brought up about what the purpose of the premium would be if the MI company assumed no risk doesn't take into consideration the common actions of insurance companies. While I'm not an attorney, nor am I going to dig up case and file for examples of whether or not the MI companies do sue fore deficiency balances, let's do some common senes cross comparison.

Take title insurance. When a home is sold the seller gives a Warranty Deed and title insurance policy to the buyer at closing. The seller, who we'll refer to as "Mr. Seller" here, is in essence saying I guarantee the title on this property is clean and here is an insurance policy that protects you Mr. Buyer so you don't have to worry that someone is going to say that you had not right to buy this house.

Let's expand on this story. Mr. Seller didn't disclose to the title company that he had borrowed $75,000 from his Aunt to start a business and in return had Quit-Claimed 75% of the ownership in his home as collateral. Mr. Seller falls on hard times as so many others in the Metro Detroit area, and stops paying his Aunt who looks to go after the house.

When this falls out the Title company is going to pay off deal old Auntie and then they are going to go after (sue) Mr. Seller for this loss.

Thus the question arises, "If the Title Insurance company assumed no risk then everyone would start asking what's the premium for?"

Of course the common sense answer is that the TI company goes after Mr. Seller because he made a promise (a warranty) that he was granting clean title to the home when he was not. While he was the one that paid for the title policy at closing, because of his breach of the agreement, they go after Mr. Seller for their loss. This happens all the time.

Switch over to Mortgage Insurance. The homeowner is promising to make timely payments and not let the property go into foreclosure in a similar fashion as Mr. Seller in our above story promised to grant clean title to his home to Mr. Buyer.

The MI company is insuring this promise to the Mortgage company which is why they grant the loan in the first place.

If the homeowner goes into foreclosure, he breaks his promise to pay and the insurance company pays the Mortagage Company in similar fashion to our Title Insurance example above. It would stand to reason then, that just as the Title Insurance company purused the seller for breaking his promise resulting in their loss, a Mortgage Insurance company would do the same. Just because you are writing the checks for a policy doesn't mean that if you screw up your agreement your insurance company isn't going to come after you.

I like info on this page quite a bit. In fact, the question "What Happens With the deficiency Balance?" is on my list of episodes to shoot for The Short Sale Show. I'll move it up and will cover the issue in general in Episode 6 and I'll drill down and dedicate Episode 7 to the MI implications and provide a backlink to this resource as well on that episode.

dez

August 13, 2008 11:54 AM

One thing I also noticed is that if a short-sale is approved and completed, and the bank did not forgive the balance of the loan, they can mark your existing mortgage balance as being late within all the credit repositories until it is paid in full. (30, 60, 90, 120 days late, etc.) In other words, the bank can mess up your credit as well if you do not pay your balance of your mortgage after the short-sale.

Mike

August 15, 2008 11:32 AM

I have to agree with Mr. Kurtz. I am currently going though a short sale of my home and we have an offer that has been in the process for months. We were just told by the bank that the PMI company want's us to sign a promissory note for $40K paying them back over a 20 year period with an interest free loan(isn't that nice of them). I was told that if we refuse to sing this note, then the PMI company can refuse the short sale even if the investor agrees and if foreclosed then they can come after us for any deficincy. We have been offered the exact amount of the appraised value of our home. The bank has had 2 appraisal companies comeout to appraise the home. How can they make us sign a note when we have abuyer for the value of the home. the value came in at $110K less then what we owe. If they were to foreclose, I'm sure they will not get enought to recover any loss.

Mgreenstein@optionnext.com

September 9, 2008 10:47 AM

Most mortgage loans actually have mortgage insurance built into the interest rate. Some of the yield spread the investor makes, other portions go to the servicing and insuring of the note. If you provide enough information to the investor who owns the note, they will decide if it is worth trying to collect future payments. It would depend on the ability of the homeowner to repay it. After the investor pays the insurance and the servicing company if there is no profit left for the investor then they will most likely not pursue it. They may issue a 1099 claiming they provided you the difference as income and they you can file a claim with the IRS that the income was relief of indebtness and not actual income.It is a vicious cycle. At the end of the day the investor has to make money. If the possibilities of repayment are greater in doing a foreclosure the investor will foreclose. If the investor feels they will have the same outcome by accepting a loss due to all of the variables involved with owning the actual property then they may accept the short payoff.

Alexander Paykin, J.D.

October 3, 2008 2:27 AM

I guess it's time for me to straighten out the record once again...

1. Brian Kurtz: First, consider negotiating with the PMI company directly. Second, recruit the bank mitigator as your ally in negotiating with the PMI company. Third, put in the effort and money to do an independent appraisal if you believe it will prove your point to the PMI Co. But here is the fact you are not grasping. The PMI company will NOT go after the homeowner directly. They will, however, do so indirectly. They will TELL THE BANK not to settle unless they get the promissory note, because under such argument, if they don't get the value of payoff plus promissory note, then they did not fulfill their duty to mitigate damages. In other words, the PMI company is saying, the loss is UNNECESSARILY large, and is unjustified, so we're not going to pay it. Do a better job of mitigating your losses. So the point is, you have to convince them that the loss is justified. You have to prove to them that letting it go into foreclosure would cost them more. That is the definition of short sales, and if you have yet to grasp that, I don't think you're in a position to give advice to others...

2. Scambuster: You're absolutely right as far as the PMI company going after the homeowner direct, but as I explained to Brian, above, the PMI company will use its influence directly on the bank, and so it is a force to be dealt with...

3. Dez: What you are describing is a wrongful and illegal practice. Write to the credit reporting companies and complain of this abuse, and they will rectify the situation. You can hire a company to do this on your behalf, but if you look for some online tutorials, you should be able to draft the necessary letters yourself. But contest it immediately, either way...

4. Mike: The offer you got from your bank was just that, an offer. The offered to let you off the hook on $70,000 of debt, which you signed for and by all legal standards owe them, and promised to repay. They have taken another $40,000, and turned it into a 0%, 20 year, loan. What I'm saying is that the deal they are offering you results in them taking HUGE losses. Much bigger than the one you're making (factor profit of loan paid off with interest, versus short payoff, with no interest, and a loss of $70k, AND an extension of $40k interest free, compared to your loss of $40k over 20 years interest free, ($166 a month), meaning a present value of about $27,600. So really, at present value, the bank is offering to take an $82k loss, and is asking you to put in $27.6k. That's not an unfair offer, considering you were the one who bought the property and asked for the mortgage and they are not the ones breaching their obligations... Short sales are not about you walking away perfectly happy, they are about negotiating the debt down to something that you can afford.

However, if you genuinely can't afford the workout the bank offered, well that's all it is, an offer. Present a counter-offer. Negotiate with them. Get an independent appraisal. Swamp them with proof that the property values have dropped. Provide detailed, documented proof of your hardship situation. Or better yet, have a good negotiator do it for you.

5. Mgreenstein@optionnext.com (Marc): Your answer was completely accurate, although reasonably boring and dry... Try to enjoy life more ;)

Alexander Paykin, J.D.
President & C.E.O.
Option Next, Inc.
www.optionnext.com

If anyone reading this has any questions and wants specific advice, feel free to contact me directly at the e-mail address below, or contact our C.F.O. and Director of Homeowner Support, Marc Greenstein, at mgreenstein@optionnext.com, or 888-311-NEXT, extension 803...

My direct e-mail is apaykin@optionnext.com

BrokenCredit.com

February 8, 2009 10:57 PM

What Brian Kurtz is referring to above with the MI company is called subrogation and yes, they can legally pursue the homeowner.

Alexander Paykin, J.D.

March 13, 2009 3:34 PM

BrokenCredit is correct. However, see my prior post above (the one from Oct. 3rd, 2008) to find out how to deal with them. Or better yet, we at Option Next can take care of it for you! ;)

Alexander Paykin, J.D.
President & C.E.O.
Option Next, Inc.
1-888-311-NEXT
apaykin@optionnext.com
www.optionnext.com

Barry B

April 28, 2009 10:47 AM

Option next is a fraud!
They screwed up my loan mod in AZ!!!
consumers beware!!!!!

Melissa T

July 1, 2009 4:09 PM

How did they mess up your loan modification? Please answer!

Alexander Paykin, JD

July 15, 2009 5:02 PM

Melissa, 'Barry B' won't be answering you, as I can genuinely say we have no client with that name. They are a competitor that used our services for a while and then failed to pay for half of the work they submitted and we worked on. They then tried to slander us while simultaneously trying to offer the same serivces on their own. They failed, and then went out of business. I believe the owners are currently being investigated by the Arizona AG, and if they're not, they should be... Their company is hope4homeownersnow.com, and if you go to their site and to mine, you will find that they are literally infringing on my company's copyrighted content an many of their pages, and are operating a fly by night scam of a business. It is unfortunate that companies like that exist, but as of right now, I can't be bothered to sue them, as there is real work to be done to help homeowners in distress...

Alexander Paykin, J.D.
President & C.E.O.
Option Next, Inc.
1-888-311-NEXT x.801
apaykin@optionnext.com
www.optionnext.com

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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