It seems the game has changed overnight since the banks got their Federal Government bailout and they are cooperating less and less with a viable short sale, opting instead to string the process along until foreclosure is the only options.
I know this seems counter intuitive. Wouldn’t the banks want to save the cost of legal fees to complete a foreclosure and the costs of having the property sit on the market for what could be months in a declining market, potentially incur loss in value, the cost of repairs, and then the cost of paying real estate commission, vandalism, back taxes, and back Home Owners Association (HOA) dues.
In a Short Sale, the buyer is already here; ready to purchase and although the bank will incur some of these same costs such as closing costs and commissions, they save on legal fees and the cost of the property sitting on the market and deteriorating in value.
It doesn’t seem to make sense, but it is exactly what is happening. I’ve seen Loan Servicers willing to blow a deal that’s been in place for months over $1500 or less. I’m going to share with you a basic short sale process step by step and then explain how the lenders are benefiting from the manner in which they are delaying and not approving Short Sales.
First, in a Short Sale it’s important to remember you are dealing with the middleman, your Loan Serving Company, which in most cases does not own the loan, so much like the secretary that blocks your access to speak with the CEO, the “Loan Servicer” blocks your access to speak with the owner of the loan; the “Investor” which could be a pension fund, a Government backed Lender such as Fannie Mae, or even a private bank.
Each Loan Servicer has their own process, but all and it is starts out with the borrower either being in default and/or listing your home for sale. Next, the borrower’s Real Estate Agent must start what we call the “Faxing Campaign.” This is not your every day fax and many agents will not have the technology necessary to get through even this first step.
The Loan Servicer will request at a bare minimum what amounts to 70 to 100 plus page package depending on the program at the time. The Loan Servicers have been insistent in receiving the requested documents via fax only, despite technology such as email. This is just the first road block the Loan Servicer takes to delay and stall the process and force Home Owners into Foreclosure.
The documents may be required include: a hardship letter, your mortgage statements, two years of tax returns, bank statements, pay stubs, or P&L if self employed, and other additional items, such as utility bills or insurance bills.
Once you’ve faxes the 100 or so pages the Loan Servicer will advise you it takes a few weeks to be scanned or imaged into their system before they can see it. Of course when you call back a few days later, they haven’t received the fax and request it to be re-sent. These games can last for months if you do as they ask, and wait a few days and check to see if it shows up in the system.
The insanity of this practice in itself is evidence of Loan Servicer’s unwillingness to cooperate and a clear act of bad faith. I’ve have this conversations with almost every major bank, Countrywide, Bank of America, Indymac, Chase, Citibank, Coldwell Bank, GMAC, and more and the process is consistent. Why? If they deny receiving the faxed package the timeline in which they are required to start working on it doesn’t start.
I’ve been given every excuse from “we don’t know where the fax went, to “just try again” to “it’s not our fault you don’t know how to use a fax” and my personal favorite, “just because you have a confirmation of 100 pages faxed on your end doesn’t mean we got it our end.” In fact that is exactly what a confirmation of fax means, but I digress.
The requirement to fax docs just so they can be come out to a scanning department only to be re-scanned into the system is outdated at best and just moronic, especially when I’m faxing an already digital copy. There should be no need to print and re-scanned just to be uploaded to the proper location. This is a day and age when I can scan it and email with a bar code so it will go directly to proper upload location, or even an email as a pdf so it can be saved to the proper location on the server and it takes them 2 to 3 months or longer to find the documents faxed.
The Loan Servicers continue to insist on the archaic system of faxing and re scanning and then wonder why pages are lost and illegible.
Our solution is to create a document with a cover sheet on each item the Loan Servicer has requested and using software we digital fax in .pdf format repeatedly once a day until they acknowledge having received them. They receive multiple copies of our fax package, which the theory that statistically they must be able to find one of the many sent. Although there have been time we’ve been forced to resort to FedEx and even after being presented with a tracking number and signature it took over 6 weeks for the documents to show up in the system at the call centers.
Once the Loan Servicer has finally admitted to receiving the Short Sale Package with the requested documents, which include an offer, the next step is to have them assign a negotiator and order an appraisal and/or a BPO (Broker Price Opinion). Most of the time there are three phases to the process.
You must repeatedly request to be assigned a negotiator or you may never hear from them again. If one is assigned and they do not look at the file within a 20 day time period it goes back into the pool and may get reassigned. Persistence is key.
And even once they’ll ordered an appraisal and/or BPO, I have seen them lose, misplace, be unable to retrieve, or see in their system the appraisal once it’s completed for more than 2 months. The first excuse you get is it’s not back yet and that it can take 7 to 10 days before it’s scanned into the system. Then the excuses become more vague after about 4 weeks with responses such as “well I see the appraisal came in, but there is no value on it” I’m extremely persistent and it has taken as much a daily call for 12 weeks before I was able to get a supervisor to make a phone call and within 10 minutes or 24 hours in a couple of cases the appraisals became magically available. Of course they are now 8 to 10 weeks old so, the next delay tactic starts.
The Loan Servicer will state “since the appraisal if from 8 or 10 weeks ago: they will need a 2nd because it will expire before they can complete the Short Sale Approval process.” It probably goes without saying but the 2nd appraisal /BPO generally takes another 6 to 10 weeks with the same run around, all the while, the home owner has taxes and HOA bills being paid with money the Home Owner can’t afford or going to collections in default making it that much harder to close if and when an approval ever comes.
All of this leads to the next step which puts the entire process into a tail spin. The Loan Servicer now advises that all the home owner “Borrowers: financial documents previously sent are out-dated due to the time it has taken to get to where we are in the process which for all insensitive purposes is nowhere.
So now we must launch yet another “Faxing Campaign” with updated everything, from tax returns (if new ones have been filed), new pay stubs, new monthly breakdown of income and expenses, new company current YTD P&L (if self employed), new bank statements, updated hardship letter if situation has changed, and on and on it goes.
Once they finally admit to receiving these documents, months have often passed. It’s like they have an entire department of people in room full of scanners and fax machines with the papers flying out of the fax machine full speed, so fast they can’t catch them all in time and those they miss are sucked out of the room by a giant vacuum before they can be scanned, never to be seen and again. The pages they do catch must be rescanned into their system into the correct place holder. It’s just painful.
And then the kicker is, after all the months have passed and all the docs have been lost repeatedly and the Loan Servicer finally comes back with an approval with counter offer that asks for $10k or $15k higher than the property comps causing appraisal issues, or they take so long by the time they give you an approval letter the buyers have moved on. Even if you have an approval and even if you get another offer with exactly the same net proceeds the Loan Servicer will make you start over in many cases. Why you ask, because they say because it’s a different offer. The fact is the entire process is a total joke. Why?
The Loan Servicers do not want to complete the Home Owners Short Sale. One fact, they don’t want to have to hire additional staff to staff a department that’s sole responsibility to lose money as a Short Sale is from the Lenders perspective accepting less than owed on a debt.
But here’s what you don’t know, the Investors in many cases have purchased Mortgage Insurance (MI) on these loans. While the MI carrier wants the Short Sale to go through the Loan Servicer gets paid in full if it doesn’t go through allowing the insurance policy to payout.
Additionally, many of these servicing agreements are long standing and have bonuses to the Loan Servicer to foreclosure instead of approving short sales, which made sense when a home owner may have been foreclosed on due to a job loss and the home was worth more than originally purchased for or the home owners had equity in the home because they purchased conventionally with 20% before the new age of subprime lending and exotic loans.
But The Loan Servicers benefit further, if they accept a Short Sale, they can sell the Deficiency to a collection agency and get paid up front, while the collection agency gets the Deficiency Judgment and tries to collect on the debt.
They are also asking for cash up front or out of escrow to close the deal, or a promissory note from the home owner.
Then the investor then gets to 1099 you for the deficiency (the different between your mortgage balance and the net proceeds) and while this 1099 is taxable to you, it is a tax write off to them, just as if they’d paid an independent contractor.
And lastly, the one that really stings is while they collect the proceeds from the Short Sale, and ruin your credit in the process, and while they sell you deficiency for cash, and take it as a tax write off while you get the tax bill, they also get what to date amounts to Trillions in Government Bailout money. Your tax dollars or in this case, printed money the Government is making to give away without a single condition or requirement that they cooperate or act in good faith during these turbulent times as record numbers of Home Owners lose their homes.
Clearly, the government bailout money was not used to buy bad loads, complete loan modifications. If you read the news, three weeks after BofA took $15 Billion in Government Bailout money they invested $24 Billion giving them a 20% stake in the largest Construction Bank in China. Yes, you hear that right, China.
President Obama has made it clear that the Government bailout money was to help owner-occupied home owners, not “those people” referring to investors, never taking into account that Small businesses make up more than 99.7% of all employers and create more than 50 percent of the non-farming private gross domestic product (GDP).
These small business owners in many cases are “those people” that invested their life savings into real estate not as a gamble but as a retirement plan. After all many of us, may have gotten caught in the crash of real estate market, but we are not naive enough to think Social Security will be around when the time comes and we need it.
So Buyers we hope you are a saint and have the patience to stick with it and not write 10 other offers and pull out after 3 months. Banks if you’re listening you get paid 4 times over for each loan.
Question for the Banks: Is it really worth it to fight a Short Sale so hard over $100 or $1500 that the Buyer not only loses the home and is forced into foreclosure adding additional fees and costing your more? I'd be surprised what your shareholders would say. The longer this crisis lasts the real estate industry will continue to lose as agents, lenders, escrow agents, and title officers who try to close deals with services who aren't cooperating for months only not to get paid.
By Olivia McClellan, Broker/Property Manager
Copyright © Triple8 Associates Inc. 2009