Short sales have become increasingly favored by New Jersey banks and homeowners to clear “underwater” mortgages on real estate.
Despite taking a loss, lenders are seeing benefits to unloading these properties faster, particularly in one of the most foreclosure-backlogged states in the country.
Short sales, however, can still be convoluted and time-consuming — sometimes involving multiple mortgages and liens, although local real estate professionals say some lenders are improving the process.
“It’s very difficult, especially if you’re the buyer, because you’d like to have some time frame on when you’re going to move. You can be told it could be any time from 30 days to 30 months,” said Albert Falciani, broker of record at AJ Falciani Realty in Vineland, who works as a real estate broker for various banks. “Everybody seems to be looking for a way to streamline the process and speed it up.”
Short sales refer to homes sold at prices below what is owed on the mortgage. They can take place before or after lenders start the official foreclosure process.
In New Jersey, where foreclosure filings rose 55 percent last year, short sales may take on an added role this spring. That is when home buying accelerates and the expiration of a key federal income tax incentive looms, said James Schroeder, an attorney and real estate agent with Keller Williams in Northfield who specializes in short sales.
The Mortgage Debt Relief Act of 2007 was set to expire at the start of this year but was extended to the end of 2013 amid the “fiscal cliff” negotiations. The act generally means homeowners of primary residences do not have to pay federal income tax on the amount of debt forgiven as part of a short sale. Without the act, homeowners selling through a short sale could owe thousands more in taxes.
“Smart real estate professionals went to their contacts and said it’s going to take an average of six months to conservatively nine months, and you have to get listed if you want to beat this sunset,” Schroeder said. “I think it’s going to be hectic in October, November, December as people try to get in under the wire.”
In southern New Jersey, non-foreclosure short sales were a significant piece of the real estate market in 2012. California-based foreclosure tracking company RealtyTrac estimated they accounted for 29 percent of 2012 total sales in Atlantic County, 14 percent in Cumberland County and 10 percent in Cape May County.
Pre-foreclosure sales — which are essentially short sales but after a bank starts the foreclosure process — also have made up a greater percentage. In Atlantic County last year, nearly 68 percent of foreclosure sales ended with a short sale, 11 percentage points higher than in 2010, according to RealtyTrac. In Cape May County, 71 percent of foreclosures sales were through pre-foreclosure short sales, 3 percentage points higher than in 2010. In Cumberland County, it was 67 percent in 2012, 19 percentage points higher than 2010.
Schroeder bought his Hammonton home in a short sale in 2009 during a process that took 14 months of negotiations.
Seeing it as an emerging field, he decided to specialize in it, and said he has seen advancements in how cases are handled.
“The area of law has matured and the lenders have gotten better at how they process. They have more capacity to handle files,” he said. “Bank of America will settle a short sale in 30 days sometimes.”
Bank of America has been one of the major lenders increasing outreach efforts to avoid foreclosure, hosting events — such as one at the Wildwoods Convention Center this week — to discuss alternatives for customers struggling with mortgages, from loan modifications to short sales.
“The goal is to avoid foreclosure. That’s a win for the bank and it’s also a win for the customer involved,” said Roger Bragg, vice president of National Mortgage Outreach at Bank of America. “The impact to their credit is not as significant or long-lasting, and from a community standpoint, it’s one less vacant house that’s not being cared for.”
On average, homes sold in short sales fetch higher prices than ones sold after banks have foreclosed. In Cumberland County, the average price difference was $22,211; in Cape May County, $101,799; in Atlantic County, $11,480, according to an analysis of RealtyTrac data.
There are also attorneys’ fees, property maintenance and other considerations that can make foreclosures costly to lenders.
“A short sale was really not a part of their lexicon or vocabulary a few years ago. The predominant recourse a lender had was to foreclose, but that was in the context of appreciating home prices. And so the big drop in home prices over the last five to seven years has shifted the way the lenders are looking at that,” said Daren Blomquist, vice president of RealtyTrac.
There are other factors also driving the shift.
A national mortgage settlement finalized last year, which came in the aftermath of foreclosure abuses, gives five of the country’s top lenders — Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally — credit for doing short sales, Blomquist said.
And in November, government-owned mortgage giants Fannie Mae and Freddie Mac issued short-sale guidelines that loosened restrictions on what it takes to be approved, including for borrowers current on their mortgages.
Cori Haberkern, president of the Atlantic City and County Board of Realtors and broker/salesperson at Century 21 Atlantic Professional Realty in Absecon, expects the local real estate market to see plenty of short sales in the future.
“I feel short sales are going to continue to be a prevalent source of business for at least the next year for us,” she said.
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