Years away from cleaning up the short sale mess?

Short sales continue to bedevil the Twin Cities real estate market. Even as the Minneapolis Area Association of Realtors last week applauded two consecutive months of year-over-year median price increases for traditional home deals, it noted short sale values slid again.

As we've noted before, the short sale supply in the Twin Cities remains big and the market here really won't recover until that inventory gets sold.

"I think short sales are going to be a big deal for the foreseeable future ... maybe three-plus years." said Carrie Newhouse, a Twin Cities Realtor who writes the Helping People out of Foreclosure blog.

Newhouse, a source in MPR's Public Insight Network, has a lot of experience working with short sales. We asked her recently for a practical look from her vantage point at the process and its challenges.

In short sales, the homeowner owes more on the house than he'll get from the sale. The bank, which likely ends up losing money on the deal, must sign off. That creates a tough situation with lenders wanting to protect their financial interests and Realtors, sellers and potential buyers frustrated by an approval process that can drag on for months.

"Short sales are a key component to the recovery of our real estate market," Newhouse said. "On my team, we are handling about 40 short sales at any given moment and we have seen changes in that specialty market over the last eight months."

Often times, we have to sell a property two or three times before we can get it closed. Not because of buyer financing, or because the home doesn't pass inspection but rather because we can't get an approval before the buyer is unwilling to wait any longer.

How long should a buyer wait before they know if they can even buy the house they have agreed to purchase? Could you wait 90 days, not to close but to find out if it could even be your house?

We just got an approval on a purchase agreement written SEVEN months ago. (It) was for a home with two mortgages and there have been lots of twists and turns on this transaction.

The buyer has to be able to execute their financing -- and we have to be granted an approval from a second mortgage to make this happen. The end of the redemption period is about the day after the allowed closing.

This first mortgage was a government backed loan and there was no streamlining, no fast track. If this is how government-back loans will be handled, we the tax payers can expect to lose a lot more money.

Short sales hurt housing markets. Their numbers in the metro area were negligible in 2006 before the recession. By October 2007 they passed 2,700 homes and jumped to 4,500 a year later, according to data from the Minneapolis Realtors group. The inventory was down to about 4,100 by January but still way more than the market can handle.

Getting them sold is crucial to the recovery, though Realtors and bankers tend to view short sales differently. Lenders are trying to minimize their losses on these deals and Realtors are trying to sell them.

Newhouse, though, is seeing some of the ice start to break. "Many banks have improved their time lines," she said.

We recently completed a short sale within 30 days of application. First Franklin was the servicer, they were reasonable and even were willing to help their former borrowers with moving expenses. Wells Fargo and CitiMortgage are also quick to respond and we usually expect an answer on files within 60 days.

The difference between the lenders who operate quickly and those who don't maybe be philosophical or organizational. It seems that lenders who move more quickly believe that short sales are a benefit to them and not just an easy out for the homeowner (which they never are an easy out for the homeowner).

It also appears that those fast moving lenders have negotiators in place who are empowered to make decisions, approve some files or quickly send them for investor approval.

Newhouse also gave some insights into the increasing problem created by second mortgages on troubled properties. It's a problem MPR's Annie Baxter took a deep look at recently.

"We are hearing of people who are hearing from their second mortgages, or their collection agency, years after the foreclosure action," Newhouse told us.

We'll save her perspective on that for another post.

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