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Posted On: 04/15/2009

Q: When an offer is made on a short sale it often takes a long time for the lender to respond. Why is this so? What is justifiable and what's not? Why can't the feds or states do something to make response time reasonable?

A: Lenders have no obligation to respond to a short-sale proposal - an unsolicited offer to buy property they have financed which would require them to take a loss. Government at any level has no business requiring lenders to respond to short-sale offers within a given timeframe.

Of course, if lenders were required to respond, then after due deliberation they could always come back with a flat "no" or a request for a far-higher price, most-probably not the reactions you want.

But even if there was lender interest in a short-sale offer it might still take a long time to work out. Here's why: Most probably the party you call the "lender" is actually a loan "servicer" who represents the loan owner. The servicer may or may not have authority to consider a short sale and, if it does have authority, the servicer will surely want to review the offer with care to get the best possible price and terms.

Q: Salesman talk about the pro's of reverse mortgages. In your view, what are the pros as well as the downsides?

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A: Reverse mortgages are financial products that work well for some homeowners but not for others. For our purposes, let's look at FHA reverse loans, insured mortgages that represent the overwhelming majority of such products and what the government calls home-equity conversion mortgages.

On the plus side, a reverse mortgage does not require monthly payments for principal and interest; it can allow owners age 62 and above to stay in their homes; and it can never result in a claim for repayment against owners or their heirs beyond the value of the property. As an example, if Smith owes $200,000 on a mortgage and is age 62, he might be able to refinance with a reverse mortgage and eliminate his monthly mortgage payments.

On the con side, if you're generally uncomfortable with debt then you likely want to avoid all forms of loans, including reverse mortgages. Also, getting a reverse mortgage is not free - there are fees and charges up front, but then the same is true with all forms of financing.

While "forward" fixed-rate mortgage debt with a traditional loan is paid down each month, with a reverse mortgage interest is added to the outstanding debt - in effect, it's really a negatively amortizing loan. Once a borrower moves, sells or dies, a reverse mortgage must be paid off. This can be done by refinancing the property, paying in cash or by selling the home. In a situation where the debt is greater than the value of the home, then the borrower or the borrower's estate can give up the property to satisfy the lender's note. The lender will get the balance due from HUD as an insurance settlement - one reason why lenders like to sell FHA-insured reverse mortgages.

Until last October HUD rules allowed borrowers to obtain reverse mortgage counseling from -- get this -- counselors paid by lenders. Congress put an end to this practice, but while the counseling process has been improved, would-be borrowers remain best served by getting outside advice from an attorney who specializes in elder law, a fee-only financial advisor or a community housing organization.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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