Whoah. With all the lender rules shifting like quicksand, and companies going out of business or selling off divisions, it's been a little crazy in the world of short sales. But sometimes a rule comes down that's a game-changer, and this is one of them: Bank of America, which of course is now Countrywide's parent company, has nonchalantly added a clause to its short sale contracts that makes owners pay back the difference between the loan value and that of the short sale.
Even if they're trying to make sure that people don't try to go to short sale when they have other options, it's going to cause all kinds of trouble, like halting the short sales in progress at both Countrywide and BofA, because people went into the process without this clause and it's a deal-breaker for them.
Also, if you're an investor trying to do a short sale, your job just got a lot harder, convincing the home owner that you aren't leaving them holding the bag. You now have to educate the homeowner that not only are you on their side, but this is the most they can expect to get on a short sale – since they will be responsible for the shortfall, they are now in the awkward position of being on the same side as the bank, urging you to get a higher price on a short sale since the deficiency will be their responsibility. This cuts into your profits two ways: in terms of cost, but also in terms of time, since it will likely both delay short sales and make them harder to close.
Another sad casualty of this situation is that more homeowners will be forced into bankruptcy to avoid the balloon now tied around the neck of their short sale, and since fewer short sales will go through, this will also push more homeowners into foreclosure. So what does this mean for Countrywide and BofA?
More bad debt on their books for longer, and more REOs which will continue to be a drag on the market as the economy finally turns around and starts its long slow climb back out of a near-Depression. Surely BofA could have gotten one of their many analysts to see this misguided gesture to their shareholders will affect many more over time? Oh, wait. They're a bank. Never mind.
The benefits to you as a short sale investor may be that there is more inventory for you, or if you've been hovering around the edges of this market, afraid to jump in, now is really the time. But please help your clients. Ask them to call their lender and ensure that this clause is not in the contract – that the deficiency will not be charged back to them (it's in their best interest to pick up the phone, of course).
If you're not comfortable having them make the call, get Countrywide or BofA to send a copy of the agreement over, and review it with your client. You can always tell the lender this clause will sink the deal, and they can always choose to take it out to save the short sale. After all, it wasn't in there last month. Who knows? Perhaps by next month, it will be gone again.