What IS a short pay?

A short pay simply means you owe more on your home or property than what it’s worth. Many people who purchased a home in the past several years (with little or no down payment) now find themselves “upside down” in their homes, and maybe the financing on that purchase money loan (or loans) has (or will) reset to substantially higher payments.

First, for sake of this article, I’m assuming a couple of things. Your mortgage payments have (or shortly will) jumped substantially. Secondly, your financial situation genuinely precludes you from making those new payments.

I’m NOT talking about someone who bought their home for $700,000 in 2005 and similar homes in foreclosure are now on the market at $550,000 (or less) – that is painful. You’re making payments on $150,000 you don’t “own” anymore. You’re able to make those payments, but it’s a huge bummer. My short answer is “this too shall pass”.

My long soapbox answer is – Why did you buy your home in the first place? If you merely bought because you thought it was a “good deal” and you were going to get rich on future appreciation, bummer. Wrong motivation.

But if your home really spoke to you, met your needs and wants, you like the neighborhood, you’re not renting someone else’s house, it’s become your “nest” and refuge – these are all the right motivations. Yes, we all want our home to go up in value, and ultimately over time it will.  So if you bought your home for the “right” reasons, hang in there for the long term. This too shall pass.

Back to short pays.  What kind of loan did you get? A “full doc” (meaning complete documentation where you provided the lender with your last 2 years worth of 1040s, W2 forms, current pay stubs, bank statements, etc)?

Or a “stated income” loan (you merely stated how much you earned – under penalty of perjury)?

If a loan was a stated income loan and a borrower claimed they earned $100k a year as an executive chef (but really flipped hamburgers at McDonalds), be very careful. I’m not going there…

But if you had a full doc loan, or the info you put on your stated income application was correct, then continue reading.

Why a short pay vs. foreclosure? A big difference is protecting your credit. A foreclosure obviously is a huge blow and stays on your credit. Also, most home loan applications ask the question: Have you ever been in foreclosure? How would you answer that in the future? The financial side of your credit “should” clear in 7 years, but would you be truthful if the foreclosure was 10 years ago? Just food for thought.

A short pay doesn’t hit your credit score as hard. It used to be that a lender would only consider a short pay under the most dire of conditions – death of the primary wage earner, divorce, etc. Big changes in the borrower’s financial condition. Otherwise, the lender would just let it go into foreclosure. But the turmoil in the financial and real estate markets has changed all that. A financial tsunami wave has rolled across our nation.

Everything up to now has been preliminary background. Now we really get into short pays.

First, talk to your lender. Congress has passed new legislation to help homeowners (see our blog for up to date info). Can you get your loan modified or re-structured so you can make the payments?

Another tangent: the big lenders too are overwhelmed with this crisis and are trying to ramp up their organizations to handle this mess. Many simply don’t have the manpower to handle their caseloads in a timely manner.

There seems to be three broad paths. First, the lender has already started foreclosure on your home. Now the time clock’s really ticking. Or second, you’re still current on your payments, but you can’t keep going like this forever. A third path is you bought an investment property you no longer can make payments on. This is probably on the bottom of the lender’s stack of priorities.

The lenders are trying (obviously) to put the bulk of their resources toward the first situation. The sad part is that some lenders may want you to be behind in your payments before they get serious with you. Again, they’re short staffed and are simply trying to do triage. Remember, the lender does not want your property. It’s better for them financially to cut their losses and work with you, but a lot of stuff may still fall through the cracks.

Now more details. How many loans are on your property? Generally, many people have two. The “first” is the primary loan. Because the homeowner didn’t have a big down payment, they in essence borrowed the down payment with a “second” loan. Those loans were probably sold to investors who don’t want to take a financial hit. Whose ox gets gored?

It’s the owner of the second who’ll take the hit in a foreclosure because of how things work. So the investor of the first loan may or may not really care if the property goes into foreclosure and they take it back, because the loss was on the investor of the second loan. There may be enough equity for the first lender to come out whole when the property ultimately does get sold to the new homebuyer.

Finally, those loans weren’t probably sold to one investor. They were bundled into big pools (sometimes called CDOs – collateralized debt obligations) and sliced and diced into many, many small parcels and then sold to numerous entities). A tiny portion of your loan may be owned by a retired mom and pop in Topeka, you yourself may unknowingly own a slice of your own loan in your 401(k) plan – you get the idea. It’s very interwoven. That’s why this is such a huge issue.

But the process will generally go like this.

• You’ve attempted to re-structure your loan, but it’s not going to solve your problem.
• So you choose to start selling your home as a short pay.
• Your lender will want complete documentation of your current financial state – just as if you were going out and applying for a full doc loan. 1040s for the last couple of years, W2s for the past 2 years, current pay stubs, assets, liabilities – the whole schmeer.
• As part of the package you send to your lender, you’ll need to have a trusted and knowledgeable Realtor do a BPO (Broker Price Opinion). It’s not an appraisal, but a very detailed report on the value of your home in today’s market.
• You will need to put your home on the market at a realistic price (see our article You’re Thinking of  Selling – be Wise).
• By definition, some lender (the first or second) is going to take the hit, so they’re really the ones in the driver’s seat. You merely are the legal owners on title.
• Hopefully, they’ll work with you (if you’ve done your homework) and will agree to the marketing strategy you’ve worked out with your Realtor.
• So now you’ve got a legitimate (watch out for bottom feeder investors who’ll low ball you with offers – but that’s another subject) offer. Internally, the lender has to figure out whose ox gets gored, what it’s worth to them financially to do the deal or not…
• Pray (or that should be at the top).

Hopefully, this has given you some helpful back ground material and a road map to follow.