Banks Taking Too Long to Approve Distressed Home Sales, Brokers Say

Apr. 30, 2010 — -- Debbie is one of California's many homeowners who have found they can no longer afford the house of their dreams. Although she stopped paying her mortgage last year, she has found a way to avoid foreclosure: a "short sell" of the house for less than she owes on it.

But even though she has found a qualified buyer, she can't get the bank to approve the sale.

"Why are they sitting on this so long?" says Debbie, who bought her two-bedroom cabin in Modesto two years ago for $250,000. She can no longer afford the mortgage after she lost her job as a financial officer, even as the house has lost half its value in the economic downturn.

"At least we got a buyer," she says.

By selling the house in a short sale, Debbie, who asked that her last name not be used, and the bank will avoid the losses and complications of foreclosure.

Short Sale Volumes Soared After Crash

Short sales are becoming increasingly common in this economy, with lenders preferring to see distressed homes sold at a reasonable discount rather than left to the ravaging effect of foreclosure.

But as short sales have soared, banks are struggling to keep up with the paperwork, real estate agents say.

"At every bank it's their mantra to say that they didn't receive the application packet," says Ryan Williams, Debbie's broker with Prudential Realty. "So you refax and you refax."

Short sales have jumped in the downturn, reaching 47,000, or 11 percent of all existing home sales, in March, according to the National Association of Realtors.

Short Sales May Delay Recovery?

In states such as California, Arizona and Florida, short sales make up an even higher percentage and some experts argue that the delays are slowing down the housing recovery in those states.

"It does delay the recovery process and prolong the downturn," says Keith Gumbinger, an analyst at HSH Associates, a mortgage research company. "That's a piece of the marketplace that could be performing that is not."

California, with a high percentage of the country's distressed homeowners, has been particularly hard hit by the delays. Prudential's Williams estimates that it takes three to nine months on average for banks to process short sales.

Sellers in other states are facing similar problems.

Short Sale Business 'Like Drinking From A Firehose'

Joe Martin, a broker for RE/MAX in Mesa, Ariz., says some of his clients have been waiting for over a year. He argues that banks simply don't have the staffing to sort through all the applications and determine which offers to accept and which to reject.

"It has been like drinking from a fire hose for the banks," he says, estimating that many short sales officers have hundreds of files on their desk at any given time.

Banks say they are doing all they can to keep up with the rapid change in the real estate market. JP Morgan Chase, one of the country's largest mortgage lenders, has doubled its short sales staff in the past year and has started implementing new government guidelines aimed at speeding up distressed sales.

"Short sales have an important role in the market," says a JP Morgan Chase spokesman. "For people who can't afford their house it might be a better solution for them, the neighborhood and investors than a foreclosure."

Banks Weighed Down By New Home Sale Rules

Paperwork has also been delayed by a spate of new government rules that are intended to help alleviate the housing downturn but, for now at least, have added to the confusion.

"The learning curve for some of this stuff is not simple, and the regulatory environment continues to change," says HSH's Gumbinger.

The biggest change to affect short sales came earlier this month under the government's new "Home Affordable Foreclosure Alternatives" program – HAFA for short -- which was introduced to help standardize short sales.

Among the new rules: before approving a borrower to participate in a short sale, lenders must first set a minimum sale price they are willing to accept. Once an offer meets the minimum, a bank must decide on the transaction within two weeks.

For Debbie, the implementation of the new rules may come too late. She says her bank officer has only just started going through her application. Debbie says she's surprised that her buyer has been willing to stick around for so long.

"This whole situation has been very emotional for us," she says. "We're just trying to do this the right way."