The Truth about Banks involved in Sales

By
Mortgage and Lending with Effective Technical Group, LLC

When a home is sold in "Short Sale," the market price of the home is less than what the owner owes on his/her mortgage or mortgages or other liens.   Just because the market is down, it does not mean that the mortgage company will approve a short sale.  Contrary to many misconceptions, they are in no way obligated to even consider a short sale.  Moreover,  some properties have more than one mortgage with more than 1 bank and possibly other liens or clouds on the title.  All lien holders have to agree to any negotiated contract or be paid in full.  

Although some of the new programs from the current administration have requirements for the banks that have received bailout money to negotiate with homeowners, compliance to these requriements is vauge.  Implementation  of any program coming from the government is left to the individual lender.  Many people are finding that there is a big difference from what they hear announced on the local news programs and what is actually available.  There are many problems with the implementation of any of these programs. 

One of the main problems deals with the bureucracy of the banks.  Because of the losses that many of the large banks have experienced, they have all cut back primarily on labor costs.  To meet the additional demand on the servicing departments, most banks "staff up" with temporary workers and/or low paid entry level employees.  These types of employees are usually not long term and the turn over is high.  The banks are continually "training" new staff to process these very complicated transactions.  Most of this kind of staff usually has never even had their own home or mortgage nor do they know much about the mortgage business.  They follow checklists and are managed by other employees with not much more qualification than themselves.  These are the people with whom a homeowner must begin the short sale negotiation. 

The paperwork is a standard package with a checklist and is sent out to any homeowner that finally reaches the correct department in the bank to request it.  There is no pre-screening for eligiblity and borrowers are not told in anyway what the qaulifying guidelines are to get an approval.  All applications are accepted and processing can take anywhere from a couple of weeks to several months.  It does sometimes speed things up if the submission is accurate and complete.  Most of the time, the final decision is not made until there is an actual buyer with a proposed contract on the property.  At that point, we are finding that the banks are not working too eagerly to approve contracts from viable buyers, especially first time buyers. 

The current market is increasing in activity from cash buyers pursuing these acquisitions.  The banks that own or need to approve these sales typically market the listings by stating that they prefer cash buyers.  Also, there are oftentimes time parameters in the sales contract that are unrealistic to meet if the buyer needs to get a mortgage for the acquisition.  Moreover, the contracts usually have stipulations in them that charge the buyer daily penalties if they do not meet these dates.  These are some reasons why first time buyers are discouraged from buying these properties. 

Initially, most buyers that needed mortgage financing were required to apply for their mortgage through the bank that owns the property or has to approve the short sale.  That makes the bank the seller.  This is not uncommon in today's market.  The problem with this is that a buyer loses all negotiating power by disclosing all their financial details to the seller.  For example, if a buyer is strongly qualified to get a mortgage for $18O,OOO and has ample assets to pay down payment and all closing costs , all this will be disclosed to the seller.  This buyer's offer might be for a $170,000 with the seller paying for all the buyer's closing costs.  After the seller sees all of the buyer's resources, they do not want to accept the offer that is advantages to the buyer because they know the buyer can pay more.  The cash buyer simply has to prove that they have the cash in the amount of the offer.

Cash buyers are good for the banks that own the property or have to approve the short sales for many reasons.  They can close quicker and they accept the terms of the contract "as is".   There typically is not the same due diligence that is done on the property that would be done if it were being acquired with a mortgage.  What that means is that with a mortgage, the bank that is lending the money, is going to check out the collateral (the property) in detail to protect their lien position.  This involves a detailed analysis of an appraisal done by a state certified appraiser that complies with strict regulations that protect against undue influence.  Also it involves a thorough and detailed title search protected by title insurance.  These two things are of the utmost importance and many cash buyers are dangerously either skipping these steps or are encouraged to rush through them and miss important defects on the physical property and the title. 

In a state like Florida, many analysts attribute the severity of the market downturn to investor concentration.  There is much to be said for that.  It is important to look closely at how that happened and how that was allowed to happen so that we can avoid many of the same mistakes.  Unfortunately, the market moves too quick and hindsight is easily distracted.  Many investors acknowledge the mass greed that made so many people jump on the real estate investing bandwagon.  During the boom years I heard the phrase " it's a sure thing" so many times.  For a minute, most people learned the lesson that there is no such thing as a sure thing and the pursuit of quick profits was contrary to stable growth.  That minute is over and once again, I am hearing those words coming from people with a little extra cash to invest.  Chasing deals because the word on the street is that "it's a sure thing" is once again, not the way to pursue stable financial growth. 

Please let me know what other details I can share with you about these and any other topics in today's real estate market.

Thank you for your time.

 

Comments (4)

Anonymous
Christopher R. Erdt

How is a Short Sale approval effected if the owner has fallen behind on their property taxes, insurance or HOA fees?

I would imagine that if mortgage holder is in distress, in most cases those said payments would be delinquent as well. Is that typically the case?

Feb 09, 2010 01:09 PM
#1
Anonymous
Christopher R. Erdt

 

Between the high employee turnover rate in Banks, and the use of temps, has this created any added security concerns?

Bank employees do have access to some very sensitive information, is it safe to give so many people access?

Feb 09, 2010 01:13 PM
#2
Anonymous
Diana Cessna

The bank will typically pay property taxes and/or insurance through a forced escrow advance and add to the borrowers balance owed.  This is because property taxes are a superior lien and insurance protects the asset.  Delinquencies on HOA fees are usually ignored because they are a subordinate lien.  This seriously impacts the other owners in the community because it causes the shared expenses to increase and the services to decrease, which in turn cycles into more defaults.  Please see my other blog entries for more details. 

Whenever any sale is negotiated, the new buyer should be buying the property free and clear of all liens.  All liens have to be paid or negotiated in the short sale.  If the new buyer is purchasing with a mortgage, the new mortgage holder will require a thorough analysis of title to make sure no other liens exist and also require title insurance to insure that nothing was missed.  There is more danger for cash buyers as they are usually rushed to closing what's called an "as is" transaction.  If cash buyers do not do their own due diligence in researching the property liens, they could be saddled with surprise bills after the sale.  I have seen this frequently as many distressed properties are offered for sale stating "cash buyers preferred" and then the contracts are written with very quick closing dates.  The cash buyer thinks they are getting a great deal because they have the capability to close quickly.  Instead the seller's bank ends up getting what they can for the property and dumping large liens on a new unsuspecting owner.  I personally have save buyers from this fate by simply doing a public record search on the property.  In one case, a property had more than 2 times the purchase price in code violation fines against it.  In another case, the 1st mortgage lender and the seller did not disclose that there was a second lien on the property. 

Feb 09, 2010 01:40 PM
#3
Diana Cessna
Effective Technical Group, LLC - Tampa, FL

Yes, consumers should be concerned about the bank employees or contracted temporary employess that have access to their confidential financial information.  I'll blog about it in more detail soon.

Feb 10, 2010 07:44 AM