What Are the Dangers of Short Sale in a Collapsing Economy?
A short sale is when a mortgage company agrees to accept less than the total amount than it is due on the mortgage. Often, this occurs when a property is sold after its current owner finds himself unable to pay the mortgage. Under a short sale arrangement, the mortgage lender, instead of foreclosing upon the home and attempting to sell it, agrees to take only partial payment. This process carries a number of risks for all parties.
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Short Sale Function
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Short sales can be arranged by any of the parties involved -- the home owner, the lender or the home buyer. In some cases, a short sale can be the best economic choice for everyone involved: the home owner avoids being foreclosed upon and owning the lender money, the lender receives partial payment and the buyer gets a good deal. This arrangement can be economically hazardous, however, particularly if the price of the house keeps dropping.
Dangers for the Home Owner
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One of the downsides of a short sale for a home owner is that his credit rating will likely take a hit. Although he will likely come out of the sale not having to pay the lender any additional money, the lender will be allowed to write off the difference between the amount remaining on the loan and the short sale price. This will harm the owner's credit rating and may make it difficult for him to find another mortgage.
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Danger for the Buyer
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While the buyer may be getting a good deal on a short sale, in a collapsing economy, the value of the house may keep falling. Some buyers purchase short sale houses as an investment, as the value of the house has usually depreciated from its peak. While the house may indeed appreciate, this is far less likely when the economy is crashing. Instead, a bad economy generally sends home prices even lower, meaning the buyer will have lost money.
Danger for the Lender
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A lender gains from a short sale by saving the cost of foreclosing the home and the difficulty of trying to sell the house in a collapsing market. However, she is taking a write-off on the home. And if she chooses to issue a mortgage to the buyer for the property -- a condition of some short sales -- the buyer may soon find himself "underwater" on the property. This can lead to the new buyer potentially ceasing mortgage payments and facing foreclosure as well.
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