Corporate Relocation

When a borrower owes more on their mortgage loan than a property is worth, the borrower is in what is commonly called “negative equity.”

When a seller is in a negative equity position, they are obligated to come up with the negative balance to pay of their loan. The seller is required to do this for two reasons:

1. The lien holder (the lender) will not remove the mortgage lien unless it receives full satisfaction of the amount due on the mortgage loan.
2. The prospective purchaser of their property will not purchase the property with the mortgage lien still on the property.

What is a Short Sale?
A short sale is a means by which a seller can satisfy the negative equity. Instead of the seller paying the negative equity, the seller’s lender reduces the mortgage loan value and accepts a lesser amount from the sale of the property—hence, eliminating the negative equity.

History of Short Sales

Historically, in situations where the seller was unable to come up with the negative equity, lenders have not allowed a short sale. Lenders were willing to allow a property to proceed to foreclosure because property values were always increasing and could support a resale sufficient to recover the loan balance. Even when a short sale was denied, it was not generally the case that the seller would default on their loan—they would decide not sell their home. Short sales were only permitted in extraordinary situations when default was imminent and the resale value would not support the loan value.

Short Sales Today

Due to across the board extraordinary losses in property values, and increases in mortgage loan defaults and foreclosures, lenders are now more inclined, as a matter of policy, to consider a short sale transaction.

The lender will still require evidence that the sale price cannot support the current loan value and will look for evidence of potential default. However, lenders are more inclined to entertain a short sale based upon current real estate market conditions and the likelihood that the property value will not support the loan value in the foreseeable future.

Lenders have historically required anywhere from 30-60 days to complete a short sale transaction. Although many larger lenders are establishing departments to address short sale transactions, the time frames are not expected to be reduced due to the increase in negative equity situations. 

If a borrower waits until an offer is received to ask their lender to consider a short sale transaction, then there is a strong possibility that they will lose the transaction while awaiting their lender’s decision. Although a lender will not approve a short sale until they know the terms of the sales transaction, they can begin to investigate the borrower’s request, set the proper parameters for approval and be prepared to make a quicker decision when an actual offer to purchase is presented. Borrowers should contact their lender as soon as possible if they are in a negative equity or limited estimated equity position on the property. Because there is a significant amount of data and several factors for a lender to consider, the sooner the lender is able to begin evaluating the situation, the more opportunity there is for smooth and successful short sale transaction. 

Lender Requirements

Lenders still require ample support indicating that the short sale is the last viable option for the borrower. Therefore, the borrower must be able to demonstrate that they have looked at other alternatives such as credit card advances, family gifts and relocation employer benefits before requesting a short sale. Depending on the borrower’s particular and unique circumstances, the lender may require that the borrower enter into an unsecured consumer loan for the short sale balance.

Many lenders also require evidence that all reasonable steps have been taken to minimize the transaction costs. Many lenders will look to reduce broker commissions and other closing charges to maximize the amount of funds available for the loan payoff. It is important to explain to a lender that in a corporate relocation transaction the employee/borrower has no transaction costs and thus a reduction will not provide more funds to the lender (and, in fact, may reduce incentives to sell the property at the best possible price).

Lenders vary as to transactional involvement—some will only review the data presented and others will actively engage in the home sale process. SIRVA has experienced lenders that want regular marketing updates and even require that they control the listing process, listing price and any listing price reductions. In order to increase sales opportunities, some lenders have even required special incentives and concessions are included as a party of the marketing strategy, including special financing offers to prospective buyers. All of these possibilities are lender specific and vary significantly based upon the borrower’s position, the facts surrounding the transaction and the transaction terms themselves. This provides an additional reason to contact the lender as soon as possible if there is the possibility of a short sale situation.

Despite the complications and time involved, short sales must be considered as a viable alternative in dealing with negative equity situations in relocation transactions until the real estate market recovers and values become stable again.