New Law stating SHORT SALES as bad as FORECLOSURES?

Hi All,

Just wanted to see if anyone has heard about a new law recently passed.  I was speaking to a lender and she is pretty knowledgable and she was telling me about a new law that passed a few weeks ago that banks are now treating Short Sales equivalent to a Foreclosure!! 

In other words on the clients credit and short sale is going to have the same impact as a foreclosure.  So if that's the case why would any homeowner want to do a short sale??  She also stated with that new law the deed in lieu of foreclosure was going to have a less severe impact on the credit than the new short sales would.

Any one have anything info on this??  Is there any truth to this?

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Permalink Reply by Catherine Smith on October 22, 2012 at 4:36am

I'm not sure if it's a state law or federal…I will need to check with her but we are in the State of Texas.  We've done short sales for client where some of them still have a 780 credit score so this would be devastating if the banks are going to start reporting them the same as foreclosures!!

Permalink Reply by Bryant Tutas on October 22, 2012 at 5:26am

My initial reaction is "don;t believe everything you hear"

I can't see this being a law. I can see it being a lender guideline. But if it is a law come back and post a link to it.

But nonetheless, short sales have always affected credit scoring about the same as a foreclosure or deed in lieu. the difference is that it doesn't show up as a foreclosure. It normally gets reported as "settled for less than owed" or something similar. This is a big difference.

The main incentive for sellers to do a short sale is that they can have some control over what happens to the deficiency and how it is handled. In Florida a deficiency judgment is almost automatic with a foreclosure. with a short sale we can negotiate a waiver of the lender's deficiency rights. This is a HUGE difference.

The seller can also have some control over when they have to move instead of just being kicked out once the foreclosure goes through.

A short sale is being proactive and solving a problem.  A foreclosure is playing the victim.

Permalink Reply by Catherine Smith on October 22, 2012 at 5:52am

I'm trying not to believe everything I hear that's why I'm hoping someone would know on here :)

In my experience a Short Sale has always been better than a Foreclosure on how it affects credit.  It typically affects our clients anywhere from 70-150pts whereas a foreclosure hits them for about 200 pts or more.  

Also the time line in which they can get another loan is also a big factor.  Typically with a Short Sale they can get another loan in 2 years whereas with a foreclosure they would have to wait almost 7 years for a new loan…again typically.

We did a short sale for a client where it didn't even really affect his credit score at all since he kept up with all his other bills so he's getting approved for a loan on a new home now as we speak.

So in the past the Short Sale was always the way to go but I'm wondering if this "new law" passed then there wouldn't be much of a reason to do the short sale.

I'm really just trying to find out if there is any truth to this as I haven't heard anything about this until she brought it up...

Permalink Reply by Jeff Payne on October 22, 2012 at 7:50am

I am sure each state is different but in Florida our goal on a short sale is for the seller to be able to relieve themselves of the mortgage without a deficiency judgement.  With a foreclosure, there is a good chance a deficiency judgement is coming and with a short sale, we have been successful in avoiding them.  Big difference in my opinion.  Credit does not define someone, credit can be rebuilt.

Permalink Reply by Catherine Smith on November 2, 2012 at 4:26am

Thanks for the reply Jeff.  I def. agree that we strive to complete the short sale without the deficiency judgement.  Still if they are saying the short sale is the same as a foreclosure most clients are going to just want to give up if they don't see the light at the end of the tunnel in what a short sale can really do for them in terms of getting another home in a few years or not paying a premium for everything because their credit is temp. impacted.  Let's just hope this is all hear say but please let me know if you hear anything like this happening because I'm sure it would happen in California and Florida first before it ever hits Texas.  Thanks!

Permalink Reply by Jeff Payne on November 2, 2012 at 6:44am

Catherine.... Educate your sellers to understand the difference.  Credit does not define someone but a hefty deficiency judgement sure could define someone.  If there credit is destroyed either way but one way can keep them from owing money after the sale, that is a no brainer in my opinion.

Permalink Reply by ALLAN ARTHUR on November 4, 2012 at 4:50am

A new law probably not, a new lender overlay, that may be. If the lender create another excuse to make more money... isn't that what it is about?

Permalink Reply by Catherine Smith on November 6, 2012 at 10:32am

Hi all…thank you for your replies.  This was just to discuss what I heard.  I'm really not aware of any such thing but this lender did mention that and she's pretty knowledgable overall.  I'm not wanting this to get ugly just a question that's all.  Thank you everyone for the replies!!

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