By GRETA GUEST
Detroit Free Press

Short sales are among the most arduous real estate transactions, often taking six months or more to close – if they get done at all.

They can be a life raft for distressed homeowners who owe more on their houses than what they’re worth, but the experience depends on a variety of factors, such as the number of lenders involved and whether there’s a hardship, mortgage insurance attached or whether the buyer has the patience to stay with the process.

A short sale occurs when a lender agrees to accept less than what the homeowner owes. The transaction requires that the homeowner has a financial hardship.

Homes with more than one mortgage and mortgage insurance tend to take the longest, said Ellen Mahoney, president of Complete Title Services’ loss mitigation division in Birmingham, Mich. A growing reason short sale deals fall through or take longer is because of mortgage insurance purchased after the homeowner closes on the deal and the loan is later sold to other lenders and investors.

Unlike private mortgage insurance required for sellers who put less than 20 percent down, these lenders and investors buy insurance to minimize risk. It is known in the real estate industry as pool insurance because it covers a group of loans that have been purchased.

Premiums are paid by the lender or investor, and the homeowner isn’t aware of it.

When the loan defaults, such as in a short sale, the mortgage company may demand that the seller pay part of what is owed to minimize its losses.

“That’s a mess. They are the worst,” Mahoney said. “It is usually the lender mortgage insurance that nobody knew about, and it is usually on the second mortgage. It is real disruptive.”

Often, the bank holding the first mortgage isn’t made aware that the second mortgage had been insured until the end of the process, even if both loans are with the same lender. If the mortgage insurance company doesn’t sign off on the deal, the process starts over again.

These kinds of delays mean buyers walk away because of the time and frustration involved.

Brian Pannebecker, 52, of Shelby Township, Mich., made an offer on a home in his neighborhood only to have the bank reject it.

“I would never, ever look at a short sale. I would go right to a foreclosure, which I eventually did. It was much, much easier.”

Instead of buying in Michigan, Pannebecker bought a two-bedroom condo in Fort Myers, Fla., near where his father retired. He made an offer that was accepted within 24 hours during the holidays. The whole deal closed in six weeks.

Buyers don’t typically ask to see short sales unless they have the luxury of waiting for an undetermined length of time to move, said Renee Reyer, a Realtor with Clients First Realtors in Canton, Mich.

Reyer does her homework on short sales. She checks the property history and finds how many mortgages the seller has to determine how difficult the deal might be to close. Based on that information, she works out the percentage of risk that the property won’t close and presents that to her clients.

Banks say they’ve been working harder to make the short-sale process easier, but they acknowledge the delays.

At Chase, the average response is 30 days from request to approval, said spokeswoman Mary Kay Bean in Detroit. Chase has completed 120,000 short sales using its own process nationwide since June 2009 and is now averaging 5,000 a month.

Klorinda Hibbert, a real estate agent at Michigan brokerage Re/Max in the Hills, spends most of her day working on short sales and has 14 in progress now. She’s noticed changes in the past year – and they aren’t for the better.

She said lenders and servicers are requesting more than one broker’s price opinion. The lender works with real estate brokers who put together a valuation on the property based on what similar properties are selling for. They’re also requesting formal appraisals. They are good for only 90 days.

“The banks are willing to go into foreclosure rather than do a short sale,” Hibbert said. “They want to get paid in full.”

Even the federal government’s program to streamline short sales – known as the Home Affordable Foreclosure Alternatives Program – has yet to gain traction because it doesn’t allow the lender to collect on the home’s deficiency.

The program was launched in April 2010, and through May of this year, only 8,541 short sales were completed nationally through the HAFA.

One reason Hibbert said she thinks lenders are allowing short sales to go into foreclosure is that if the mortgage is insured, lenders and investors can submit a claim to recover some of the money.

In a short sale transaction where mortgage insurance is involved, the mortgage insurance company gets a say in the sale price of the home or asks the seller to agree to repay part of the loss over time, and that can create more delays.

“The mortgage insurance companies are making them almost impossible. That’s a whole different animal,” Hibbert said. “We can have the bank approval and then the mortgage insurance company stalls for two months, and they want more money.”

With home prices still falling in many parts of the country, those delays can be costly. As the months tick by, the property value falls, pushing buyers away and lessening the chance that a deal will go through.

Maria McGuire, a broker with Re/Max Advisors in Chesterfield Township, Mich., has a short sale pending with the mortgage insurance company demanding her seller sign a promissory note for more than $34,000 to make up for what it expects to lose on the deal. The insurance company pays some of the investor’s losses on the deal and looks to the homeowner to recoup its shortage.

Evelyn Sokol, 62, a retired Chrysler office cleaner, has an offer on her 1,000-square-foot Shelby Township, Mich., home, but will likely lose the home to foreclosure even though she never knew her lender had purchased mortgage insurance on her loan. The home is priced at $75,000.

Sokol, who bought the home in 2001 for $146,000, put more than 20 percent down and did not need the mortgage insurance. At some point, her lender pooled her loan with others to sell to investors and purchased the mortgage insurance.

“This is absolutely ridiculous, and expecting a woman who is surviving on Social Security and a small pension to pay this? I’ve never heard of this,” McGuire said. “How do they make a homeowner responsible for something they didn’t even sign on to?”

Alan Goldberg, director of strategic loss mitigation activities for Genworth Financial, a Richmond, Va.-based company that specializes in mortgage insurance, said investors can buy additional coverage if their analysis of a pool of loans indicates more risk than they are comfortable with.

Many Realtors avoid short sales because they can be so difficult, including Michelle Chappell, an agent with Real Living John Burt Realty in Oxford, Mich. She sold a home in Bruce Township, Mich., this spring that took eight months to complete. She represented the third offer.

“This was the last one I sold. I said, ‘No more. I won’t do it,’ ” she said. “They are just heart-wrenching for these buyers.”

Chappell said the buyers looked at 80 houses before seeing “the one” in Bruce Township.

“Whatever bad could happen in this deal, happened,” Chappell said. “I don’t see any change in short sales. I don’t understand that. There should be some kind of general process that everyone goes through. It just differs from bank to bank. It’s almost as if they are throwing curves in there.”

The seller, Tim Meagher, 56, said he lost two buyers and saw his home’s appraisal change three times during the 16-month short sale process. His lender finally approved the third offer. He owed about $430,000 on the home with two mortgages, and it eventually sold for $203,000 after numerous price reductions in the list price attracted the final offer.

“They told us we were approved to close. We made arrangements, I moved out and then they told me I wasn’t approved,” Meagher said. “The buyers wanted my home. That was the only thing that kept this deal together.”

What further complicated Meagher’s sale was insurance on his second mortgage. The mortgage insurance company also had to approve the sale and had its own way of valuing the property.

Also, the buyer moved in before closing and started making improvements – and that pushed the last appraisal up. The bank’s appraisal came in around $224,000, higher than the offer at $183,000. The bank agreed to reduce the price to $203,000.

Meagher ended up bringing $13,000 to closing and signed a promissory note for $10,000 paid over five years to the lender. The buyers had to bring an additional $20,000.

“We still have a lot of people upside down in their homes, and this is one of the few ways they can mitigate their situation and move forward,” said Meagher’s agent, Janet Graham with Hall & Hunter in Birmingham, Mich.

Tracy Giannetti, 38, and her husband, Joe, bought Meagher’s house and, despite the tears and frustration, are pretty pleased with their new 3,600-square-foot home.

“I didn’t know at certain points, but it was worth the wait,” Tracy Giannetti said. “I sure did learn a lot. Do your homework and always hire an attorney when you are dealing with a short sale.”

Qualifying for a Short Sale:

What you will need to qualify in terms of paper work and forms can vary by lender. Here are three key things a homeowner would need to qualify for a short sale, according to the Certified Distressed Property Expert Web site:

-Financial hardship: There is a situation causing you to have trouble affording your mortgage.

-Monthly income shortfall: A lender will want to see that you cannot afford, or soon will not be able to afford, your mortgage.

-Insolvency: The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.

Things to consider in a Short Sale:

-Most experts agree that it is wise to hire a Realtor who is experienced in short sale transactions and a lawyer, if possible.

-A short sale is less onerous to one’s credit than a foreclosure. For instance, Fannie Mae allows people with a short sale on their record to get another mortgage after two years while those with a foreclosure have to wait seven years.

-Once the seller has negotiated a deal with the bank about how much, if any, money to bring to the closing table, the bank usually issues a deficiency waiver that would protect the seller from being sued later on for the balance.

-Keep the lines of communication open with lenders/servicers.

-Keep detailed records.

-Send everything to the lender/servicer by certified mail.