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A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.


Losses for “suspicious” transactions on short sales are up 20% from 2010. Suspiciously fraudulent short sales are where a lender may have suffered additional losses due to the short sale transaction quickly being followed by a resale for a higher price. Analysts from CoreLogic found that one in every 52 short sales in 2010 were “suspicious.” These transactions were responsible for $310 million in losses in 2010. CoreLogic believes that by the end of 2011, U.S. banks, as lenders, could face losses of $375 million because of short sales.

States such as California, Florida, Arizona, and Colorado are leading the way with these same day re-sales. On average the resales are $50,000 greater than the lender agreed upon short sale price. The study also pointed out the fact that investors in limited liability companies are the buyers in 2% of all short sale transactions, but in 28% of the suspicious cases, which has been suspected for some time. Craig Focardi, senior research director at The Tower Group said, “Identifying risk and monitoring distressed asset sale trends is absolutely essential for lenders to preempt potential losses.” The study examined more than 450,000 single family home transactions that were completed as short sales in the past three years.

 
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A new report by the National Association of Realtors (NAR) found that the sale of previously owned homes fell 0.8 percent in April. April’s numbers brought down the annual sales pace for pre-owned homes to 5.05 million, from 5.09 million in March. Many reports do year-to-year comparisons but that is difficult right now because April and May of last year saw a sales surge in response to the homebuyer tax credit. Comparing April with previous months has still shown that the market is not performing well. The reasons for the decline in April appear to be centered on appraisal issues, as well as higher loan standards.

In a related NAR survey, appraisal problems have shown to be restricting contracts. The survey shows 11 percent of Realtors reported a cancelled contract because an appraisal came in below the buyer’s and seller’s negotiated price, ten percent had a contract delayed, and 14 percent said a contract had to be renegotiated to a lower price because of a low appraisal. Receiving a loan has been the other issue. Banks are tightening lending requirements and insisting on larger down payments. Many buyers are holding out from getting a loan, fearing that the market will continue to plummet, which economists say is likely. Even sharp price declines and low mortgages have not been enough of a boost for the struggling market.

 
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The Federal Trade Commission has a new rule directed mainly towards mortgage relief scammers but as it stands now, it is also unintentionally harming the real estate professionals who represent clients involved in short sale transactions. The FTC’s Mortgage Assistance Relief Services (MARS) rule, which is currently in effect, was created to protect distressed home owners from mortgage relief scams and ensure that people who provide counseling, advice and other services to troubled home owners are indeed providing a benefit for the fees they charge. It bans all upfront fees for renegotiating mortgage terms and mandates that certain disclosures are made to consumers if a short sale is negotiated with a lender on their behalf or when advertising short sales experience.

Currently, the rule states that real estate professionals must make certain disclosures: first in all commercial messages advertising short sale services; second before real estate professionals begin mortgage assistance services on their client’s behalf; third when they present their client with the lender’s short sale approval letter. The National Association of Realtors is working closely with the FTC to correct some of these issues, especially in the second and third disclosure area. FTC’s goal is to help make the rule more applicable to real estate brokerage.

 
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