Strapped Homeowners ‘Sell Short’
When Gary Kroeger bought his Hollywood Hills home five years ago for $495,000, he thought it was the best investment he could ever make. But when hard times forced the television and stage actor to put his house up for sale he soon learned otherwise.
After a year on the market, he received only one offer--and that was $200,000 less than his purchase price. And it was not enough to pay off his mortgage.
Kroeger, 36 and out of work, was in a tough financial bind. “There was no way I could make a $4,000 monthly house payment,” he said. “I owed Great Western Bank $335,000.”
Kroeger’s real estate agent suggested a possible solution to his plight--a “short payoff.”
Also called a “short sale,” a short payoff is an arrangement in which a mortgage lender agrees to allow a severely strapped homeowner who can sell his house to pay off the loan for less than what is owed.
A short payoff enables distressed homeowners to sell at current market value, which in many cases--given the state of Southland real estate--is less than their loan balances, turn the proceeds over to the lender and escape with their credit rating anywhere from intact to seriously damaged. (How short payoffs are treated on credit reports varies widely from lender to lender. Some forgive the foreclosure entirely, some note “foreclosure satisfied” and others assign the “paid-foreclosure” rating.)
Why would a lender agree to accept less than it was owed on a loan? The lender avoids a lengthy--and costly--foreclosure proceeding on a non-performing mortgage.
“Short payoffs help us cut our losses,” said Ross Conyers, first vice president of loss and mitigation at G.E. Capital, a property mortgage insurance company. “It stops the interest meter ticking and cuts down on our foreclosure costs.”
On the recommendation of his realtor, Kroeger hired an attorney specializing in short payoffs who acted as an intermediary between him and his lender to negotiate the deal. “Getting a short payoff allowed me to start my life all over again,” Kroeger said.
Kroeger is not alone in resorting to a short payoff. So are many Southland homeowners who are forced to sell after having watched their home equity evaporate in the punishing three-year free-fall of housing values,
While discounting mortgage payoffs was unheard of a few years ago, most lenders now have departments whose task is to work with such problem loans.
But getting a lender to agree to a short payoff is no snap. Each offer is reviewed carefully and many lenders will not discount unless there is some kind of financial or medical hardship.
“Some consumers feel that because the property values have dropped the bank will automatically accept their offer,” said Kathie Cramer, a realtor with RE/MAX of South Orange County. The banks, in an effort to minimize their losses, are looking for fair market value, she said.
“We analyze the cost of taking an offer as opposed to selling property after a foreclosure sale,” said G.E. Capital’s Conyers.
“We need to know why a customer wants a short payoff,” said George Schwartz, senior vice president of loss and mitigation at Countrywide Funding Corp., the nation’s largest mortgage lender. “Is it a hardship, an inability to pay or a bad investment the customer wants to walk away from? We want customers to keep their homes.”
Said former homeowner Kroeger: “Basically I had to prove I had no money and had no means to pay my mortgage. I was out of work. I had depleted my savings. If the bank hadn’t given me a short payoff, I would have had to file bankruptcy.”
The home seller should not expect to receive any money from the short sale. And in some cases, they may have to put in some cash to the short payoff work.
That was the situation a 34-year-old manager at a computer company found herself in. The woman, who asked not to be identified, and her partner were facing foreclosure when they received a $170,000 offer on their two-bedroom rental condo in Sherman Oaks. They owed Sears Mortgage $220,000.
“As a professional I never thought I would be in the position where I could not pay my debts,” the woman said. “My husband’s business was not producing any income. I had one income to pay two mortgages. My business partner could not afford to buy me out or the $2,200 monthly payment.
“The lender agreed to accept our offer if we paid $5,000. We lost everything we put into our condo, but it was a tremendous relief,” she said. “My source of migraine headaches disappeared.”
Besides headache relief, a short payoff is also beneficial for homeowners because it helps protect their credit rating.
“It is certainly easier to purchase or rent another home with a foreclosure satisfied rating as opposed to a bankruptcy or a foreclosure sale,” said Leonard Schapira, a Hermosa Beach attorney who specializes in short payoffs.
However, homeowners who have refinanced and who are considering a short sale should be aware of the potential tax liability incurred in a discount arrangement.
“If the loan is a refinance . . . the cancellation of indebtedness will be taxed as income,” said Burt Forester, a senior partner at the Price Waterhouse accounting firm. “For example, if the purchase was $600,000, the loan amount was $500,000 and the fair market value was $400,000, the cancellation of indebtedness would be $100,000.
Peggy Clay is a Los Angeles free - lance writer.
