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                        Analysis of Short Sales of
              Residential or Commercial Property

Lender Approval Process

The lender’s approval procedure can take time, sometimes
several months, therefore an understanding of this process can
help in managing expectations and planning for the transaction.

The lender’s decision of whether to approve an offer that has
been accepted by the seller is based on a determination that
both the seller should be permitted to short sell their property
and the offer will generate more sale proceeds for the lender
than would foreclosing on the property and reselling it later.  If
the lender determines that either the seller is not an appropriate
candidate for a short sale or the offer is not sufficient to
generate more cash for the lender than foreclosing then the
lender will not approve the short sale and the transaction will not
go forward.

Each bank has their own criteria for evaluating short sale sellers
and short sale offers, so it is often difficult to predict if a lender
will approve an expectant short sale seller and a proposed short
sale offer.  But the process that lenders undertake is fairly
similar, even if the guidelines and criteria each uses is not the
same.  Lenders receive the short sale seller information
package and the short sale purchase offer and assign a
negotiator to the file.  The negotiator reviews the file and related
information, ensures that all the information and documentation
that the lender requires is present, and compares the file to the
lender’s short sale criteria.  

The negotiator may order a broker price opinion (BPO) or a
comparative market analysis (CMA) to evaluate the sufficiency
of the short sale purchase offer.  A BPO is an opinion of the
value of the property that is given to the lender by a broker who
the lender has retained.  A BPO is similar to an appraisal.  A
broker retained by the lender would also prepare the CMA, but
a CMA is a compilation of comparable sales within the market
for the proposed short sale property.

If the lender approves the seller and the offer, then an approval
letter, sometimes with terms and conditions, is issued.  An
example of a condition that the lender may impose upon the
transaction is the requirement that the short sale close by a
certain date.  Because this is a common condition the buyer
must be ready to close when the offer is submitted to the
lender.  An example of a common term that the lender may
impose upon the transaction is a limit on the amount of broker
commissions the lender will pay.  

If the lender does not approve the short sale, they may make a
counter offer, but often a simple rejection is all that is
forthcoming.

If the lender has sold the loan in the secondary market, the
lender approval process is further complicated.  The offer and
seller documentation must be forwarded, for review, to the
servicer that services the pool of loans for the investors that
purchased the loans.  Identifying the servicer for such loans
may be difficult and in some cases, if the original lender has
failed, then the FDIC may be the servicer.  The servicer will
base their decision upon the terms and conditions of their
agreement with the investors who have acquired the pool of
loans.  Such agreements often have rather vague language that
requires the servicer to protect the investments and interest of
the investors; therefore predicting the outcome of a servicer
review of a proposed short sale is very difficult.

Short sale buyers and sellers must be patient.  The review of
the offer and the seller documents by the lender can take
significant amounts of time, sometimes a few weeks but usually
several months.  Lenders are not necessarily organized to
review and evaluate short sale offers because such
transactions were not traditionally prevalent in the marketplace.  
Further there has recently been a significant increase in the
number of requests for lenders to review proposed short sales
and lenders may not be equipped to process such a high
volume of short sale requests.  Also, as described, the process
for a lender to review an offer for a short sale is rather involved:
they must gather information on the market, evaluate the
current situation of the loan, evaluate the seller and the offer in
light of the lender’s short sale criteria and guidelines, and
evaluate the prospects of selling the property at a later time if
they were to foreclose.  So lenders not only have to perform the
same due diligence on the property as the buyer, but they must
also undertake due diligence on the seller and the loan, and
compare both against internal and external guidelines.  And the
lender must do this for every request they receive for approval
of a proposed short sale transaction.  Therefore lenders are
facing increasing demands.  And some lenders require the
potential short sale properties be on the market for a minimum
period of time, sometimes ninety days, before they will approve
a short sale, this allows the market an opportunity to bid up the
purchase price.

                                                              Return to Analysis of Short Sales of
                                                              Residential or Commercial Property
Law Office of
Craig W. Little, P.A.