Article on Short Sales in Merrimack Valley Housing Report

[Each month I contribute an article to the Merrimack Valley Housing Report (MVHR) which is a collaboration between the UMass Lowell Institute of Housing Sustainability, Center for Family, Work and Community and the Middlesex North Registry of Deeds.  More information about this electronic publication is available here.  In the May edition which is now available online, I wrote about housing prices.  The June edition has already been distributed electronically to subscribers (subscriptions are free) and will soon be available to everyone else online.  In the meantime, here is my article for June.  The topic is short sales:]

In our still-depressed housing market, one option sometimes available to would-be sellers who find themselves underwater on their mortgages is a short sale.  While nothing in the documents recorded here at the registry of deeds expressly identify it as a short sale, there are ways of inferring that a particular transaction as such.  This article attempts to gauge the frequency of short sales by scrutinizing deeds for property in Lowell recorded during May 2012.  Before reaching that data, however, it would be helpful to review some of the basics of mortgage law and practice.

What is commonly referred to as a mortgage is in fact two related but very distinct transactions.  By signing the promissory note (which is not recorded at the registry), the borrower enters into a contract with the lender in which the borrower agrees to repay the borrowed amount in a particular time at a certain rate of interest.  By signing the mortgage (which does get recorded at the registry), the borrower conveys to the lender an interest in the real estate with that interest being the right to seize and sell the property should the buyer fail to honor the terms of the note.  That seizure and sale cuts off or “forecloses” the right of the borrower to get back his interest in the property.  To review, the note is a contract and the mortgage is a conveyance of real estate.

When a homeowner sells his property, he typically realizes enough money on the sale to pay the existing mortgage in full.  In fact, it is the attorney for the new buyer who communicates with and pays the seller’s lender – all the seller gets at the closing is any money that is left over.  Once the seller’s lender receives that pay off check, the lender produces a document called a Discharge of Mortgage that it sends to the new buyer’s attorney for recording at the registry of deeds.  If the seller’s debt was not to be paid off, the buyer would not purchase the property in the first place.

The exception to this practice is a short sale.  That term refers to a case in which the seller’s lender agrees to take less than the full amount owed on the promissory note to discharge the mortgage.  It is only when the lender is completely convinced that the house is indeed worth less than the amount owed on the mortgage that it will agree to a short sale.  And in a short sale, the lender is only agreeing to discharge the mortgage and not necessarily the underlying debt represented by the promissory note.  In many short sales, the buyer remains indebted to the lender for the balance owed on the note even though the lender has released its security interest by discharging the mortgage.

With that as a very long introduction, we may now look at the various deeds recorded for property in Lowell during May 2012.  Because deeds that showed no or little consideration are typically transfers within families, this study only considered deeds where the consideration was greater than $60,000.  To determine whether any of these might be short sales, I looked at how the seller had become the owner of the property and the total amount of any mortgages on the property that were in existence in May 2012.

In Lowell during May 2012, there were 59 deeds recorded that listed consideration in excess of $60,000.  The sellers on 13 of those 59 deeds had obtained title through foreclosing a prior mortgage.  These sellers were institutional lenders (typically the buyer at a foreclosure auction is the lender conducting the foreclosure) and so none of these would be short sales.

The next group was 14 deeds that involved sales by estates or related parties.  Here, it was either the executor of a decedent who was the official seller or the seller had obtained title from a related party such as a parent or spouse.  In none of these cases did the seller have an outstanding mortgage that could have been the subject of a short sale.

The third group was 11 deeds that involved sales by “longtime” owners with “longtime” being defined as any seller who had obtained title to the property prior to 2000.  While some of these properties did have outstanding mortgages, they were in amounts that were substantially less than the new sales price of the property meaning that the proceeds of the new sale were more than enough to pay off the old mortgage.

With these 13 foreclosures, 14 estate sales and 11 longtime owners eliminated from the pool, we were left with just 21 deeds that were potential short sales.  Of these 21 deeds, 14 sold for less than the seller had paid for the property.  In 11 of those 14, the May 2012 sales price was also less than the mortgage indebtedness on the property.  We can therefore infer that these 11 were short sales.  That means that 18% - nearly one in five – of the sales of property in Lowell in May 2012 were probably short sales.

One final note: of the 7 properties sold at a profit in May 2012, five had been purchased only in 2011 and none of them were purchased with mortgages; they were all cash deals.  This suggests there may be some real estate speculation underway, a development that may deserve future scrutiny.