I got a chance to watch a couple of agents go at it with each other in a real estate forum trying to answer a question about doing short sales. It was interesting, to say the least. Besides the two main agents who proclaimed themselves the “experts” and hijacked the conversation, there were a few others who chimed in and made some comments. But the question was never specifically answered.
The question posed was whether a lender will approve a short sale if the borrower had assets. He didn’t provide a lot of detail but wanted to either do a short sale or let his home go into foreclosure and he specifically asked not to get into a debate about the ethics in not paying his mortgage.
The argument or “discussion” in the forum quickly evolved into a big debate about the ethics of what people considered to be strategic default. One expert proclaimed it was morally and ethically wrong to engage in strategic default and the lenders would not go for it. The other expert proclaimed morality and ethics had nothing to do with his decision and it was more about money.
As a San Jose Short Sale Agent, I tend to agree with the latter expert. When you are dealing with short sales with lenders, the department you deal with is called Loss Mitigation. Let me say it again: Loss Mitigation. Their job description is patently obvious: it is to mitigate or lessen the loss for the lenders.
Yes, there obviously are moral and ethical implications of not paying your mortgage when you have the financial ability to do so. I firmly believe you should pay when you can and live up to your contractual obligations. However, the question posed specifically asked not to judge the ethical implications but sought opinion as to whether a lender would agree to a short sale when the borrower stopped paying and was headed towards foreclosure.
There is no definite yes or no answer in these matters as the answer lies in the details. It has a lot to do with how much assets the borrower has or does not have. However, if the lender is faced between foreclosure and short sale, from my experience, the loss mitigation department chooses short sales over foreclosures. At the end of the day, the primary decision will be about which method loses less money for the lenders, then, other factors like ethics and mortality can be entertained.
Why do you think big lenders like Chase and Wells Fargo are offering people up to $35,000 to do a short sale without even verifying their financial information? HAFA recently amended its rules to state that servicers are no longer required to verify any financial information, but only to collect signed hardship letters. Do these actions by large lenders and servicers sound like they are overly concerned about the ethical or moral issues surrounding foreclosures?
I can’t speak for other States, but in California, the recent changes in the law means if the lenders agree to permit a short sale, then the issues about deficiencies become null and void. Once a short sale has been approved, the seller can walk away clean without looking over their shoulders. Yet, another procedure that make completing a short sale more effective and efficient and preferable to foreclosure. It’s all about money; if the institutions can make more money foreclosing, they will certainly choose that method, but everything recently is geared towards choosing short sales. Yes, the lenders hate strategic defaulters, but they hate losing money even more.
So back to the question about would a lender approve a short sale if the borrower has assets? It would depend on how much assets the borrower had and whether foreclosure would yield more money for the lender or a short sale.