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55 Comments on Why banks preferred to let short sales turn into foreclosures
like your little follow me on twitter ... so now I have to learn how to do same
Robert, a friend called me the other day to vent about a bank she was dealing with on a short sale. The bank said they would go with an offer she had submitted if she would reduce her commission. She protested, saying that the property was about ready to go to foreclosure and that the bank would lose much more money, and wouldn't they be better to pay her, take the good offer and be finished with the transaction? The bank said no, and that they would just "write the loss off". There you have it!
Hi Robert -- If banks know how to count, based on GAAP and their own internal business practices, one would think they would be dumping these properties fairly quickly when a decent offer comes in.
That said, one loss mitigator the other day compared an offer price to what Zillow said.
I think the vast majority of banks are completely overwhelmed and just flat out dumb as a bag of rocks when it comes to real estate.
At least they can't get into brokerage these days..
Unbelievable isn't it!
Portsmouth NH Real Estate
I've often wondered about this, figure those in charge are sitting somewhere in a dark closet waitng for the light
Very interesting.
I'm starting to see banks do a better job handling short sales, maybe I'm just getting lucky....
Robert,
I can't pretend to tell you how banks run their books only that everything they do is for a reason - and that is to maximize the profitability of their balance sheets according to the tax law;see Well Fargo, Wachovia.
I've found this to be true in our market as well in Prescott, AZ.
Thanks for sharing!
:) PS
Thanks so much for the insight. In cases where there were two mortgages with two different lenders, I could make sense of it in my head, but in other instances, it just made no sense whatsoever. It's rather sad to know that much of the financial disasters in America are being prolonged because of Accounting Rules...
Well, I was excited to have gotten a really good offer on my short sale listing today. After reading this discussion, I'm not so optimistic. This is such a convoluted system, isn't it?
Linda Schulte, Keller Williams North Atlanta
This sounds like it makes sense -- not the smartest , but makes sense.
This is to Dean, comment #17. That negotiator at Wamu was stoned. If they took the $2000 they'd still have a $28,000 loss.
Hi Robert,
Very interesting, things like this are happening to all of us. Although I'm certainly no expert in this issue, I tend to agree with Jay's comment. That was also my understanding of mark-to-market.
I'm afraid Dean's comment of what he learned from the second lien hold may be too accurate. The decisions made just lack common sense unless there's another rationale.
Once it is foreclosed, they write off 100% of the value, though it still has value. That doesn't make much sense either. They may be trying to time their own quarterly reports and hold off on cutting deals on some to retain better value like you said.
I'm sure it has something to do with generally accepted accounting principles, vs common sense principles.
Great post! Great discussion. I second the motions that:
1. Banks are under-staffed and unprepared, and
2. Those loss mitigators we are dealing with are ill-trained and inexperienced
3. That those in charge at the banks are "in the dark"
Robert, there are a number of issues of why the banks pass on short sales, and much depends on the individual mortgage, how it's structured and the local foreclosure laws. Then each lender has their own playbook and is typically overwhelmed, and without a standard to go by, it's nearly impossible to have an idea of how any given loan will be handled. There's more than just the write-downs for tax loss and bailout money. Gabe mentions control of the asset, as the bank may only be a servicer, with the actual note part of a bundled security. Other complications can be a real or assumed 'better' payoff from an insured mortgage, or in the case of a 2nd., the jr. or other lesser lien holders wiped out in the foreclosure that wouldn't get a cut of the short sale pie. The banks and Wall St. didn't really understand the paper they were funding to begin with, let alone have a game plan for 'if' the house of cards came tumbling down, which is where they stand now.
Our experience has been those banks which actually carried the loan are more willing to work with a shortsale than those servicing the loan where investors are involved. I have sent examples to several people in our senate and congressional district.
The more of us who contact our legislators with examples of their experience the better our government forces can deal with such. The government unfortunately never addressed the investors..
I just saw this explanation written by Arthur Delaney and Ryan Grim on Huffington Post 5/8/09.
"The more precise answer is related to securitization, the method by which banks bundle together different mortgages and slice them up and sell the pieces to various investors. Securitization makes negotiating a real estate sale that results in a loss nearly impossible.
"The most significant aspect is that so many of the banks' mortgages have been securitized, put together and bundled, sold off to Iceland or China or some godforsaken place," said Dave Liniger, founder and chairman of global real estate company Re/Max, in an interview with the Huffington Post. "The bank has to go through all of the various people who are stakeholders and it becomes a very lengthy process, and the bank is turning off the realtors by not even getting answers back to them, sometimes for months."
Banks have little incentive to untie those bundles. Since mortgages are listed on the banks' balance sheets at the value of the original loan, if they complete a short sale they must record a loss on their balance sheets. That would explain why banks drag the process out as long as possible. In Ellis' case, the property is sitting vacant a year after the first offer, allowing the bank to list the original value on its balance sheet all along.
According to research firm Campbell Communications, only 23 percent of short sale transactions are actually completed. "Three out of four potential short sale transactions fail, principally because the mortgage servicer takes too long to respond to the offer," said Tom Popik, author of the survey. "When these same properties are later sold it further depresses real estate prices."