The following are true CASES from our years of processing short sales:
- CASE A: We presented Lender X with an offer of $85,000. Lender X refused the offer, foreclosed, then listed the property for $60,000 and immediately accepted an offer of $55,000.
- CASE B: We provided an offer that thrilled the first lien-holder, but the second lien-holder refused to accept $3,000. The house foreclosed and the second lien-holder received $0.00
- CASE C: We provided an offer of $120,000 with 3% seller concessions. The lender rejected the offer. We presented a back-up offer of $110,000 with 1% seller concessions. The lender accepts the second offer.
What the heck is going on? Are the lenders stupid? Aren't they losing all of this money?
Well, yes and no. Once you understand how the system works, you start to see why these lenders make these "crazy" decisions.
You see, most lenders we deal with (particularly those with big names like Wells Fargo or Bank of America), do not own the loan you are attempted to short. They simply own the servicing contract. So while the short sale spends months sorting itself out, and you feel like they are losing "thousands" of dollars. In truth, they are really only losing "hundreds". They get paid each month for successful collections.
In order to approve a short sale, this servicer, as a part of their contract, must make sure the short sale is approved based upon certain underwriting criteria.
So while it seems "stupid" that the lender would not accept an offer that nets them more, the truth is, an investor has set out underwriting guidelines that the sale must meet, regardless of the "net".
Since you are "negotiating" (and I use that term loosely) with the servicer, not the actual owner of the loan, their leeway in accepting an offer is extremely limited. This can make the short sale process tedious and frustrating and sometimes it can cause the lender do something "stupid".
So what happened in each of the above cases?
- CASE A: This was an FHA loan. At the time (FHA has since done away with this short sale underwriting guideline), if the BPO valued the property at less than 62% (I may remember that exact percentage incorrectly, but it was something around 62% -- someone correct me, please) than the original loan amount, they would automatically deny the short sale and move to foreclosure. The fact that they ended up with about $30k less in their pocket at the end of the day did not matter.
- CASE B: Despite the fact that Fannie Mae loans would only pay up to $3k to second lien holders at the time, the second lien holder's underwriting would not accept less than 20% of the loan amount ($50,000).
- CASE C: The underwriting guidelines specified the maximum allowed seller contributions bo buyer-paid closing costs as 1%. Even though the second offer was less net for the investor, the servicer was bound to take the lower offer because the higher offer needed 3% seller concessions.
Trying to relay this information to your client isn't easy. The distinction between "investor" and "servicer" is lost as they just know their mortgage company as "the lender". Therefore, when they seem to be making "stupid" decisions, they are, in fact, simply following contractual guidelines as they underwrite a short sale.
This probably doesn't help alleviate the frustration we all can feel when dealing with a lender, but hopefully it will make us all just a little bit more patient!