The foreclosure crisis is far from over. Millions of desperate homeowners are trying to dig their way out. They can't afford their mortgage and can't qualify for help. For many, the answer to their problems seems to be a short sale. The bank agrees to sell the home at a loss and the homeowner walks away, but that's not how it works. Homeowners across the country are learning the hard way the pitfalls of short sale.
Kent McCain wanted a piece of the pie, the American dream, when he bought his Fredericksburg home in 2004. For five years he and his family lived the dream. "Although we didn't have the million dollar home we had something of our own to call home," he remembered. "We felt like we worked hard. We deserved something ourselves."
Their kids were growing up and making memories for a lifetime. Then the real estate market crashed. Their sub-prime adjustable rate mortgage doubled from $1300 a month to $3000. The value of their home had plummeted. They found themselves buried in paperwork and tied up in red tape trying to save their home. The lender would tell them to do one thing while continuing to foreclose. "Over here they're now telling you 'you need to be three months behind" he lamented.
Trying to avoid foreclosure the McCains chose a short sale. The lender agreed to sell the house for less than the McCains owed. "I thought that would be the end of it. It didn't raise an eyebrow. We were still devastated though. We were like but at least we get out of it without having this big loan over your head," he said.
They were wrong. The house had a second mortgage, and although the second lien holder got a small payment in the sale, it went after the rest getting a judgment against them for 50-thousand dollars. The McCains felt backed into a corner. "They just want the money. Nothing else matters. Screw you, pay me. That's what it all boiled down to," he said.
Their realtor Dedra Brown sees this more often now. She had warned the McCains this might happen. Banks, more often the second mortgage holder, will sue homeowners for the remainder of the mortgage after a short sale. It's called the deficiency. In other cases the lender will drop a bomb days before the sale, demanding the homeowner bring cash to the closing table or sign a promissory note to close the deal. It's a shock to homeowners deep in debt. "They immediately star thinking where am I going to get this money? If I $10,000, I had $20,000, I'd be paying the money in the first place," Brown said.
Homeowners may not like it, but it's not illegal. In almost every state, including Maryland, Virginia and the District, the law allows lenders to collect the deficiency in a short sale or foreclosure. Some states limit the amount to the market value of the home or require the lender to follow certain procedures. The bottom line is the debt isn't necessarily forgiven.
What people don't understand in the process of getting a mortgage, you sign a note that makes you personally responsible for the amount that you borrowed," said Nick Vlissides, a real estate attorney.
In the wake of the robo signing scandal on foreclosures the number of short sales is expected to rise 25% this year, according to CoreLogic, a firm that monitors real estate data and trends. Vlissides says the best protection for homeowners is to negotiate. "You want to have it spelled out that it's forgiven because you're buying yourself a lawsuit in the end."
That's what "Liz" thought she did when she sold her District condo in a short sale. "It's a very confusing process because it's so many ifs ands or buts to it," said "Liz", who did not want to be identified.
Her first mortgage agreement clearly says she wouldn't owe anything else but the paperwork for the second mortgage did not, despite receiving a small payment from the sale and agreeing to release the lien. "They hounded me, the banks, the attorney," "Liz" recalled.
The mortgage, plus interest and attorneys fees totaled more than $50,000. Six months after the sale, the bank demanded payment. At first the lender agreed to drop the amount to $35,000 if she paid in a lump sum. "Liz" was flabbergasted. "I don't have the money. I'm working three jobs trying to make ends meet in the first place and I just don't have the money to pay them back," she told the bank.
The lender took her to court, agreed to drop her debt to $17,000. She'll must pay the loan back in monthly installments. It's $50 a month for the first five years, $75 a month for the next seven years and $100 a month until the debt is paid off. She'll be paying it off for the next 20 years. "I just feel like the bank is taking advantage of you," Liz felt.
The key real estate experts and attorneys say is to negotiate before the sale goes through. Not just with the first mortgage holder but the second mortgage lender too, if there is one. Vlissides offered some tips to people going through the process:
-Consult with an attorney to understand your options between foreclosure, a short sale or bankruptcy. Your local legal-aid society can provide a low-cost consultation for those with limited resources.
-Get everything in writing. The short sale agreement from both the first and second mortgage must clearly state that the deficiency is forgiven.
-If the lender refused to forgive the debt, try to negotiate the debt down to a manageable amount.
-Negotiate a payment plan you can afford and make sure it's at 0% interest
If a lender gets a judgment against a homeowner in court, the situation can grow worse.
"They can garnish your wages; they can garnish your bank accounts. They can record liens on other properties you might own, even properties in some jurisdictions you don't even own yet," warned Vlissides.
Ultimately it's the bank's call whether to forgive the debt or go after the shortfall. In the McCains case there was no negotiating. "We just wanted to weather the storm. Tell us how. We work everyday, we pay our mortgage. How do we salvage this? That was never an option put on the table," McCain said.
FOX5 contacted the Mortgage Bankers Association, which represents the mortgage industry, to get a response on what's happening with short sales, but got no response.
So why not just foreclose? Homeowners who do that can be on the hook for the entire mortgage. "There may be better options for you than a short sale, maybe bankruptcy is a better course of action, maybe going into foreclosure, it just depends on your particular situation," said Vlissides.
One option the McCains tried was to modify their loan through the federal government's Making Homes Affordable Program. The government had bailed out banks, but federal programs to help homeowners like the McCains avoid foreclosure have fallen short. "It was just chasing your tail running around in circles. At the end of the day they make it nearly impossible to save their home," McCain said. He tried every program he could find but found no help.
He's not alone. According to government reports, As of July only about 27% of the 2.5 million delinquent home loans were modified through the federal government's program. Then there's the Housing Affordability Foreclosure Alternatives Program. It was supposed to help homeowners avoid foreclosures through short sales. Participating banks agree to waive the shortfall but only 15,954 short sales were completed in the program.
Those statistics don't bode well for the millions facing foreclosure and looking to a short sale, as the way out. Homeowners often choose a short sale because it's not as detrimental to your credit score as a foreclosure. If the debt is wiped out in a short sale, that makes sense. When the debt is not, which is more often the case these days, homeowners may still end up in financial ruin. "For people who go through the short sale process, overwhelmingly most people have opted to file for bankruptcy," said Brown.
The McCains declared bankruptcy. They were unable to pay their mortgage and unable to pay the $50,000 debt from the short sale hanging over their head. The ordeal broke their hearts. "It devastated us. It was like a slap in the face. It was terrible. Absolutely the worst thing that could have happened," said McCain.
In the end, the house the family bought for $299,000 sold for only $90,000, less than a third of the mortgage. The banks lost a small fortune, but the McCains lost their home and their dream.
How the largest lenders compare in loan modifications:
Federal Housing Finance Agency Foreclosure Prevention & Refinance Report