The Case for the Short Sale

Two people live in a home they can’t afford.  Now, this home may be anywhere USA, and the home could be any price; those people could be you.

It was a fine buy during the housing boom, dancing with the mantra ‘real estate never goes down in value’.  Who did it really take by surprise? 

Ah, we reminisce as we read these comments from Angelo Mozilo the CEO of Countrywide Financial (BusinessWeek.com July 25, 2007):

Mozilo says he was blindsided. “Nobody saw this coming,” he told investors in a conference call. “S&P and Moody’s didn’t, but they simply downgrade bonds. They don’t take hits. Bear Stearns certainly didn’t.” Mozilo’s take seems to be that aggressive lending by mortgage companies had nothing to do with the industry’s troubles: “It was the deterioration in real estate values that was the base cause. We had none of these problems as real estate values were going up.”

Mozilo also blames the Federal Reserve. “The Fed knowing that well over 60% of the loans made were indexed to the Fed funds rate, increased the rate seventeen times. You never knew when they were going to stop. So for a Fed governor to say the lending industry had this coming is unbelievable when the Fed was a contributing factor to this.”

Pay no mind to the $130 million in stock sold in the first half of the year and “pay no attention to that man behind the curtain!” although the SEC inquiry may take a peek or two.  We judge not!  Besides that, this article isn’t about the mortgage CEOs of the world.  This article’s about two people who live in a home they can’t afford.

Why can’t they afford their home? 

In our story, the culprit is the ‘stated income’ program. 

Deep down inside somewhere, somehow, I presume someone (read: everyone) involved in that transaction surely knew the Greeter at Walmart didn’t really make $10,000 per month.  Nevertheless, there the loan file went, from application to closing on the Subprime and Alt-A Super Train – soon to become, a train wreck.

Maybe one month, maybe two, could be six or more; but one day, those payments will be past due and then foreclosure.  Stated income is that way you know.  Stated income for income that is not true.

So what do our two people do?  They are current on their loan, yet the home mortgage is upside down.  The house is worth 1/3rd less than the balance on the loan.  That’s easy: short sale.

The credit report will list maybe a thirty-day, maybe a sixty-day late and then ‘settled for lesser than balance’ with a zero balance.  The credit score may well be above 620 in twelve months.  Then rent for a year.  Save five percent for a down payment and in twelve months, buy another house at 30-40% off on a short sale.

That’s what I call getting even.