Tuesday, February 9, 2010

Zombie short sales could come back to haunt you

Last week I attended the C.A.R. Conference in Indian Wells, CA as a newly appointed director. There were a great many interesting topics but none so scary as the prospect of what I call the "zombie short sale".

Most sellers and agents believe that a short sale means their debt obligation to the bank is over. However, that's not entirely true. If you asked for a "non-recourse" agreement with the bank then yes, you're off the hook. However, since most people don't ask for that the bank CAN come back to recover the loss from the short sale. This erroneous assumption is taken from the foreclosure arena where non-recourse is part of the deal. California is a "non-recourse" state.

So, if you walk away from a short sale down a few hundred thousand dollars, you can expect the bank to come back looking for it somewhere down the line. The zombie short sale returns!

Now, just to make things more interesting is that a lot of borrowers obtained what we called "liars loans" or "no doc" (aka no documentation) loans which could include exaggerated incomes and assets. If someone got one of these loans and lied on the application, then all bets are off.

In either a foreclosure or short sale, fraud becomes a basis for recourse on the loan - meaning they can come after you to collect the loss. Once again, the zombie returns!

Los Altos and other high-end markets have seen a few short sales so I dont' see this being a major problem for us. However, it could be a HUGE issue in the Bay Area in general. What I believe it could do is create a large rise in personal bankruptcies, prolong the recovery, and reduce the pool of available buyers in future years. All of which could stall future growth in property prices - regardless of the area.

For clients and agents - what do you think about this situation?

No comments: