Loan Servicers can make more money on a foreclosure than approving a short sale!?

Servicers Can Make More Money Foreclosing then Short Selling a Property

A great post by Pacita Dimacali with a collection of very valuable links for consumers (and real estate agents not familiar with the ins and outs of a short sale) to read over that will help explain some issues going on with Short Sales. I've provided a little more explanation into the difference between a "servicer" and the actual investor that owns the loan as an opening paragraph.

From Pacita's Post Below....

Pay Close Attention to:

CONSUMERLAW.ORG REPORt ON "Why Servicers Foreclose when They Should Modify And Other Puzzles of Servicer Behavior"

And read over how Servicers can jack up fees "servicing" the loans.

On Page 18 of the report:

"Servicers’ dependence on fees may also partly
explain their reluctance to enter into short
sales. In a short sale, the borrower typically
bears the cost of arranging the sale, thus depriving
the servicer and its affiliates of the fees they
could charge for default management, including
selling the property. Short sales are an example
of a divergence in interests between the servicer
and the investor: the investor saves money
if the borrower, rather than the servicer, bears
the cost of arranging the sale, since the investor
must reimburse the servicer, but not the borrower,
for the costs of the sale, even if the sale
does not generate enough money to cover the
outstanding principal balance. The servicer,
however, may lose some money and is unlikely to
profit at all from the transaction. Only if the servicer’s
financing costs outweigh the foreclosure
fees charged and a short sale is significantly
faster than a foreclosure will a servicer profit by
agreeing to a short sale over a foreclosure. This
disjoint may explain in part investors’ willingness
to pay servicers greater incentives for short
sales than for modifications. As between a
short sale and a foreclosure, the servicer’s only incentive
to favor the short sale are payments by
the investor for performing a short sale. Only if
those payments are larger than what the servicer
expects to squeeze out in fees from the borrower
and default management fees from the REO sale
proceeds will the servicer’s scales tilt towards a
short sale."

The vast majority of people automatically think that because they are sending in (or not) their mortgage payments to Big Bank that received TARP Money, that the bank owns the note. NOT always the case... they may only be servicers for the investors that actually put up the money for the mortgage.

There is one particular bank that just so happens to service a very large amount of loans that fits under the:

"the servicer’s only incentive
to favor the short sale are payments by
the investor for performing a short sale. Only if
those payments are larger than what the servicer
expects to squeeze out in fees from the borrower
and default management fees from the REO sale
proceeds will the servicer’s scales tilt towards a
short sale."

So... don't be surprised if you attempt to do a short sale and this particular servicer asks for 5 to 10% of the difference between what you owe and what the final settlement will be. On top of that... they will more then likely clearly state in their approval documents that they retain their right to pursue the deficiency judgement. (In Nevada... that can be up to six years from the settlement date for a short sale.)

Yes... it happens and one particular servicer has quite a system in place for  foreclosing on the home and putting it back up for sale in their system. Thus... allowing:

the servicer and its affiliates to charge fees for default management, including
selling the property

So... if you've come across a situation where it appears that a bone head decision was made in denying a short sale... there may be more to the story.

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