Damion Matthews cited by Chronicle
May 6, 2007
SFCondo’s Damion Matthews was quoted in a recent Chronicle article about the short sale market. The piece is currently being discussed at “The Housing Bubble Blog“.
Read the full article after the jump.
Real estate short sales: “win-win” or reward for failure to live within one’s means?
By Carol Lloyd, Special to SF Gate
Friday, May 4, 2007“It’s usually a win-win situation,” says Loni Parmelly. “I had a client who walked away with a $600,000 debt forgiven.”
What? Your mother forgets you owe her $60. But who forgives you for a debt of $600,000?
Usually, when something sounds too good to be true — it is. But as more people are facing the possibility of foreclosure — losing both their house and their credit in a process fraught with humiliation — a little-known transaction known as a “short sale” may seem like a dream come true. Short sales occur when a lender allows a homeowner in default to sell a house for less than the total value of the loan. In most cases, the lender then forgives the remaining portion of the debt.
Parmelly, author of the book “Success in Short Sales” and a Dallas-based consultant, knows well that most lending institutions don’t want foreclosures to go through. For 16 years, she worked as a “loss mitigator” for lenders to offer alternatives to foreclosure. “There are a barrage of options,” she says. “There’s loan modification — changing the terms of the loan — usually by adding the missed payments to the balance of the loan, then stretching the loan to 30 or 40 years. There’s also the possibility of adjusting the interest rate down.”
But when it becomes clear that the homeowner can’t afford the house under any circumstances, then short sales become the best option. Admittedly, this “win-win” situation involves parties who have already resigned themselves to being losers. Lenders know that repossessing the home (probably with a declining value) will cost them tens of thousands of dollars to maintain, refurbish, market and sell, with no guarantees that it will recoup the same amount as from a short sale. By the same token, homeowners understand that foreclosure will not only take away their home but also give them a seven-year black mark on their credit.
Even the community at large may benefit from homeowners opting for short sales in advance of foreclosure. Since houses sold in short sales tend to be less heavily discounted than those sold at foreclosure auctions, such sales may help mitigate drastic decreases in the values of nearby properties.
Indeed, the acknowledgment of the desire to avoid massive foreclosures was tacit in Freddie Mac and Fannie Mae’s plans to buy tens of billions of dollars of subprime mortgage loans over the next few years. The programs would allow lenders to refinance homes into 30- and 40-year loans without borrowers first resolving their credit problems.
How prevalent are short sales? It’s difficult to say. In the Bay Area, the multiple listing service, for instance, has no special box to check divulging whether a sale is a short one or not, though many agents write it into the comments. Parmelly says she has noticed that lenders have been “staffing up” their loss-mitigation departments, but they are still extremely understaffed.
Indeed, according to real estate agent Damion Matthews of Prudential, San Francisco, the increase in short sales has led to a problem. Many lenders are so busy that they don’t respond to short-sale offers.
Last month, Matthews put an offer on the short sale of a Rincon Hill condo on behalf of a client and waited three weeks for an answer. “I called the lender over and over,” he says. “There was no way to get a hold of a human being. Later, I heard that they never got around to looking at the offer. The condo went into foreclosure and was auctioned off.”
Anecdotally, some agents say that short sales are surging in communities with spiking foreclosure rates. Indeed, rising foreclosure rates may be a bellwether for a rash of short sales to hit the market soon. Last month, Realty Trac reported that foreclosures had increased 35 percent nationwide compared to the first quarter of 2006, with California’s foreclosures more than doubling in the past year.
Although San Francisco and many other parts of the Bay Area haven’t been hit hard by foreclosure fever, some local cities and counties are seeing dangerously high foreclosure rates. According to Realty Trac, Oakland currently has the 22nd highest foreclosure rate in the nation, with one foreclosure for every 146 households — almost double the national average.
Other smaller cities also reveal escalating problems for many homeowners. Realty Trac currently has 1,902 foreclosures, default notices and bank-owned sales listed in Antioch — amounting to one in 15 of its 29,466 households. By comparison, San Francisco has 882 similar listings, only one in 373 of the city’s 329,700 households.
Where exactly did short sales come from? According to Parmelly, the idea grew out of the down market of the early 1990s, when lenders were eager to find new loss-mitigation tools to extricate themselves from becoming real estate investors instead of banks. “Lenders are financial institutions,” says Parmelly. “They are not in the business of real estate.”
Once the boom began and foreclosure rates dropped, few people needed short sales, because loans almost never were more than that value of the home. Now, as loans go adjustable with many real estate markets in decline and 100 percent financing more difficult to obtain, short sales are emerging to represent increasing portions of the new listings.
Last year, as the markets softened, short sales developed into their own micro-industry: In addition to consultants like Parmelly — who trains agents as well as working with sellers and buyers — there are Web sites, seminars and businesses dedicated to teaching the art of the short sale. Short sales even have their own celebrity: Last year, the personification of an over-leveraged real estate market, Casey “Iamfoacingforeclosure.com” Serin, promoted them as an escape route for anyone (like him) who was drowning in housing debt.
So what’s the catch? Short sales do have one downside for sellers: Lenders claim whatever debt they’ve forgiven as a loss on their taxes and issue a 1099 form to the seller for the amount. “It’s taxed as earned income,” says Parmelly, adding that, depending on the loss and the seller’s tax bracket, it could amount to a significant increase in taxes.
Serin’s story illustrates a different downside of short sales — they don’t always work out. Although initially he managed to sell some of his homes through short sales, in the end he did face foreclosure on a couple of homes where the lenders had approved the concept of the short sale but eventually either rejected all the offers or neglected to respond.
As Serin points out, his lenders lost more money because the homes sold at auction for less than his short-sale offers. But negotiating with a large institution doesn’t always make sense. Parmelly has noticed that the behavior of lenders varies widely, with some lenders behaving just horribly — “basically they want the house to go into foreclosure” — and others offering polite, well-informed staff who work with homeowners to avoid losing the house.
I accept that whatever banks, regulators and homeowners can do to stave off foreclosure is probably for the good of all — but forgiving a $600,000 loan? Whatever happened to personal responsibility? It’s a weird facet of American society, which better rewards those who try to live the American dream and fail miserably than those who live within their means. In the end, those left carrying a fat debt, bad credit scores and lingering regrets are as much a mirror of our system as all the happy homeowners who make their mortgage payments month after month.
http://sfgate.com/cgi-bin/article.cgi?f=/gate/archive/2007/05/04/carollloyd.DTL
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