Over the past several months I have been working on an estate that owns real property.  The property is subject to a home equity conversion “reverse”  mortgage, and unfortunately, the unpaid balance, which became due and payable upon the death of the decedent, is now greater than what the property is worth on the open market.  Thus, a short sale is the only way to proceed, other than allowing the bank (which in this case will remain nameless) to foreclose on the property.

The difficulty I have encountered in trying to accomplish this short sale serves as notice of how regulation of the mortgage market can cause poor economic results.  There is a HUD regulation that requires the short sale price to be at least 95% of the appraised value of the property (the appraisal must be obtained by the mortgage holder, the buyer’s appraisal will not be acceptable.)  There also can be no seller’s concession as part of the purchase price, even if the contract price less the seller’s concession is still in excess of 95% of the appraised value.

I do not understand where the 95% figure comes from, it is quite arbitrary and has no relation to reality.  If the short sale cannot be accomplished, the home will go into foreclosure, which results in increased legal fees, court fees, and service of process fees. The foreclosure price at auction can easily be 75% to 50% of the appraised value.  There is also the issue of the damage that can occur to this home if it remains vacant for very much longer.  So if a purchaser makes an offer of 94% of the appraised value, my contact at the bank says that ”per HUD regulations the sales price must be 95% of the appraised value.” Because of this arbitrary 95% limit, more money will be lost in the foreclosure. 

Because the reverse mortgage is federally insured, the bank knows that it will be made whole whether the property sells via short sale or foreclosure auction.  It is the government, and we the people, who are on the hook.  The federal insurance is paid for through mortgage insurance premiums that are added to the cost of the mortgage, so hopefully the burden on the federal fisc is not so great. But the mortgage insurance premium increases the cost of the mortgage in the first place, and reverse mortgages are notoriously expensive.  So, why does HUD have a seemingly arbitrary regulation in place that kills the possibility of a short sale unless the sales price is 95% of the appraised value?  Particularly when we know that the only likely alternative, a foreclosure auction, will result in much greater economic loss, and increased costs for the loan in the first place?

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