Agents Balk At Requirement That Short Sales Be Offered At Auction

Written by Posted On Monday, 17 February 2014 15:03

At the January meetings of directors of the California Association of Realtors® (CAR) a substantial number of attendees expressed considerable frustration and dissatisfaction with a relatively new aggravation in the short sale world. Their sentiments are shared by many agents around the country. I refer to the introduction of bank-required auctions into the short sale process.

Some might think, "Well, so what? The short sale market is pretty well over by now anyway." Would that it were so. Last November, Reuters published an article with the title "A new wave of U.S. mortgage trouble threatens." The article dealt with the re-setting of Home Equity Line of Credit (HELOC) loans that were originated during the bubble years, primarily 2004 - 2007. The numbers are staggering. Said Reuters, "Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611.4 billion from $346.1 billion..." A vast majority of those loans re-set at the ten-year mark. Re-setting these loans usually means that they convert from interest-only payments to loans that will fully amortize over the remaining twenty years. This results in a very large payment jump.

There's not a great deal of historical data for this, but early signs are not encouraging. The Reuters article points out that a "high percentage of home equity lines of credit went to people with bad credit to begin with…" Amy Crews Cutts, chief economist at Equifax, is quoted as saying that the increase in payments on HELOCs is a pending "wave of disaster." In short, it appears that short sales will continue to be with us - perhaps in increasing numbers - for at least a few more years.

So, what is the concern about auctions being inserted into the short sale process? (Note: We are not talking about foreclosure auctions.)

Here's what happens: Larry, the listing agent, takes a short sale listing, duly noting that selling price and terms will be subject to lender's approval. Barbara, the buyer's agent, brings an offer acceptable to the seller, so the deal is shipped off to the lender (or servicing agent) for approval. But, rather than give a 'yes' or 'no' or counter offer, the lender says this.

"We will approve the deal, but only if we first put the property up for auction and find that we cannot get a better price. If we can get a better price, then the auction buyer gets the property. The listing agent still gets his/her commission, but the original buyer's agent is left out - unless the original buyer joins the auction and winds up being the highest bidder."

Today, the major players in this scenario are Nationstar as the lender (having purchased significant loan portfolios from both Lehman Brothers and Bank of America) and serving as the auctioneer.

The complaints are varied. Naturally, buyers' agents are the most upset, as they stand a chance of being completely cut out of the deal. Moreover, it is an enormous frustration to their clients who, depending on how much they want the property, may have to pay more for it (which, of course, could happen anyway) and will also have to pay a 5% surcharge to the auction company.

While, as noted, listing agents will still receive their brokerage fee, they have concerns about liability. In a typical transaction, a buyer's agent has considerable responsibility to look out for the buyer's interests. Buyers' agents do such things as arrange for inspections, examine title issues, look for all sorts of 'red flags', and disclose matters of concern to the buyer. An auction company isn't going to do that. (Indeed, its paperwork will give it plenty of coverage in that regard.) Listing agents - who well may not want to be dual agents - are concerned that they are going to be held liable for matters that normally would have been the concern of a buyer's agent.

At their January meeting, the CAR directors voted as follows: "That C.A.R. "SPONSOR" legislation to require an auction company to indemnify or "hold harmless" the listing broker in a transaction against liability that results from the auction company's actions in a short sale transaction."

Whether such legislation, or a version of it, can gain traction in the legislature is an open question. It will be an interesting process to watch.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.

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Bob Hunt

Bob Hunt is a former director of the National Association of Realtors and is author of Ethics at Work and Real Estate the Ethical Way. A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at

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