St. Louis Post-Dispatch Jim Gallagher column [St. Louis Post-Dispatch]

June 09--When J. D. Tucker and his domestic partner split up, the distress went beyond heartache.

He became a single father with five adopted children, and only one income. It wasn't enough to pay the mortgage on their south St. Louis home.

He bought it at the height of the housing boom. He owed $265,000 on a house now valued at only about $155,000.

He fell behind on the mortgage. "You start getting notices that they were going to foreclose on it," he said.

Instead, Tucker took an option that's gaining popularity among distressed homeowners here. He convinced the bank to accept a short sale: The home is sold for less than the amount of the debt, and the bank forgives all or nearly all the remainder.

"It's generally the lesser of two evils," says Kenny Reinhold, the Coldwell Banker Gundaker agent who handled the deal. Depending on the details, the owners' credit may take a lesser hit than in foreclosure, and he escapes the debt.

Banks are becoming more amenable to short sales as the housing slump drags through its fifth year. The results show up in the statistics.

In 2008, just after the housing bubble burst, sales of foreclosed homes in St. Louis County outnumbered short sales by more than two to one. Now it's roughly even.

There were 452 "pre-foreclosure" sales, the overwhelming majority being short sales, in St. Louis County in the first quarter. That's a 33 percent increase from a year earlier, according to RealtyTrac, an online market for distressed property. Such sales were up 76 percent in St. Louis city, 25 percent in Jefferson County and 3 percent in St. Charles County, 56 percent in St. Clair.

It's part of a national trend. "Lenders are approving more aggressively-priced short sales, which in turn is resulting in more successful short sale transactions," said Brandon Moore, chief executive officer of RealtyTrac .

Short sales sales equal 11 percent of all sales in in St. Louis city, 10 percent in St. Louis County, 9 percent in St. Charles County and 12 percent in Jefferson County, 9 percent in St. Clair, 10 percent in Madison and 3 percent in Monroe.

Tucker couldn't get his lender to lower his monthly payment. He considered sitting in the house until the bank foreclosed, a process that could take many months. But he wanted a way to completely escape his debt.

Creditors in Missouri and Illinois can pursue foreclosed debtors for "deficiencies," the difference between the amount owed and the amount the bank collects from selling the house.

In practice, banks rarely try to collect since they know the debtors are broke, although they may come back later after people with high-income jobs, such as lawyers and doctors. Banks may also sell such bad debt to collection agencies.

Tucker is a hairdresser -- not a high-income profession. But he was worried that the bank might some day sue him. "It could be years from now and the bank could say, 'Now we want our money.'"

Tucker put out a for-sale sign last fall asking for $220,000 on his city home. "Everybody said it was too high for the neighborhood," said Tucker, so they began steadily dropping it. "When we got into the $160,000s, I said I can't believe this house isn't being snapped up."

Then came an offer for $155,000, and they took it to the bank.

His lender said it would take the offer if Tucker signed a promissory note for $30,000 -- a little less than a third of the deficiency. After more bargaining, they cut it to $10,000 and Tucker agreed.

Tucker was unlucky. Most short sales don't include such payments. Most, although not all, abolish the remaining debt, real estate agents say.

Last week, Tucker was packing up to move. "I'm happy with it. Ultimately I'm glad it's going to be over," said Tucker. "I never in a million years thought I'd be in the situation I'm in."

His decision to short-sell, rather than accept foreclosure although it probably hastened the day when he can buy a house again. But it's not clear whether it will rescue his credit score.

FICO, the credit scoring company, says someone with a good credit score, 720, will see it drop to 570 to 590 after a foreclosure. A short sale, with the deficiency forgiven, will drop it to 605 to 625. But a short sale without forgiveness -- which is unusual -- has the same effect as a foreclosure.

FICO says it generally takes debtors three to seven years for scores to recover after either a short sale or a foreclosure.

Fannie Mae, which backs half of all new home mortgages, makes borrowers wait two years after a short sale for another mortgage if they have a 20 percent down payment, and four years if they have a 10 percent down payment. Borrowers have to wait seven years after a foreclosure, although Fannie will cut it to three years with "extenuating circumstances."

Persuading banks to take a short sale can be a slog. Banks have to be convinced that they'll lose even more money in a foreclosure. "They want to see your pay stubs, bank statements. They want to see why you need a short sale," said Tucker.

Job loss is a big persuader. Divorce may also sway the bank. Banks sometimes play along when employers transfer debtors to other cities.

Bankers say they prefer a short-sale to a foreclosure -- if the buyer makes a reasonable offer. Banks avoid the legal, maintenance and marketing costs of taking and selling the house.

One of the reasons for rising short sales is that real estate agents are getting better at it, bankers say "The agents are getting smarter about working with the bank. They know what the bank will accept," said Gary Douglass, CEO of Pulaski Bank, of the largest St. Louis-based mortgage lenders.

Homeowners are also more familiar with short sales, bankers say. They're more likely to call a real estate agent rather than wait for the sheriff to show up with an order to get out

Banks differ widely in their attitudes toward short sales. "Bank of America is not getting easier. Wells Fargo went through a difficult period, but now they're getting more friendly," says Elizabeth Kayser, a Ballwin attorney who specializes in negotiating short sales with banks. Loans guaranteed by the FHA often cause problems, real estate agents say.

Just persuading the bank can take months, before the house goes on the market. Once an offer arrives, there's usually another long wait ahead.

Three years ago, it took six to nine months to get banks to say yes or no to a short sale offer, said attorney Kayser. Now, the wait is down to two to five months, she said.

That requires a very patient buyer. "A lot of people are moving in with their parents just to get the deal," says Joe LoPiccolo, a real estate agent who specializes in short sales.

At Pulaski Bank, Douglas said he'd be surprised if his bank took more than 30 days to decide on an offer.

Part of the delay in decisions stems from a massive processing jam that has vexed the industry since the housing bubble burst in 2007, leaving homeowners hoping for mortgage modifications hanging in limbo and delaying foreclosures, sometimes for a year or more after the homeowner stops paying.

"A lot of banks are not staffed up. You may have a fellow who has a stack of these and he gets to you when he gets to you," says LoPiccolo.

Often the bank holding the mortgage isn't the only decision maker. If there's a second mortgage, its holder gets a veto. Second-note holders stand to be wiped out if the home goes to foreclosure. Still, they demand a payment to agree to a short sale.

Many loans carry private mortgage insurance, which protects the bank -- not the homeowner -- if a loan goes bad. That gives the insurance company a say. "That's the real trump card," says Kayser. "They can make or break a deal."

Sometimes all of them send appraisers to look at the property. Then they ponder it.

In exchange for waiting, short-sale buyers get a cheap house. In Missouri, short sales go for 20 percent less than comparable homes, according to figures from RealtyTrac.

Foreclosed home sold by banks go for a 33 percent discount. That's one reason that banks are leaning more toward short sales.

Matthew Branson and fiance Caitlin Beck, both 25, were willing to wait long to get a good bargain. "We weren't even looking for a home at first," said Branson. But while "messing around" on Google they spotted a two-bedroom ranch they like near Lemay. They paid a visit and made an offer through a Coldwell Banker agent.

It was a short sale, and the sellers were asking $79,900. They offered $70,000, and expected to be turned down. A little more than a month later, the lender accepted. They closed two weeks ago and moved in.

Branson thinks his wait was relatively short because the lender was a small St. Louis credit union, not a multi-state bank or national mortgage servicer, which dominate the industry. "It was fairly easy," said Branson. "I'm very happy."

___

(c)2012 the St. Louis Post-Dispatch

Visit the St. Louis Post-Dispatch at www.stltoday.com

Distributed by MCT Information Services