In Defense of the Short Sale Selling, Loan Mod Applying, Principal Reduction Requesting Public
I just read the AR newsletter featured post entitled, “Rewards for being a debtor... Punishment for those that are not,” and it really got me going this Sunday morning. An agent sets out her opinion as a free and clear homeowner who is troubled as she watches the government continue to offer program after program to try to solve the housing crisis. It is an interesting read but I disagree strongly that those who are being asked to wait in line for a government program are being “rewarded.” I know the fact that I live in California strongly affects my opinion in the matter -- the financial devastation here is just too great.
Interestingly, a few months ago, I was approached by a homeowner who felt similarly, and we had a great discussion. She was, what I would like to describe as the perfect hybrid, and thus a good illustration of the issues affecting us in California. Although she was not a cash buyer, she put $250,000 down on a $500,000 home. So, although she was a debtor, she clearly had the sensibilities of a cash buyer. And even with her large down payment, she was actually still underwater by $30,000 or $40,000 and she did not have the additional resources to sell or refinance her property. She also felt very strongly that people were being rewarded by the government for bad behavior. Of course she was going to continue to pay, she had invested so much with her down payment and all the payments she made toward her mortgage. However, a couple weeks after our conversation, she also lost her job due to the economic downturn. Personally, I hope that she is able to obtain some relief and save her home with a loan mod or complete a short sale and I don’t consider it a “reward.”
Here’s my take on the housing crisis. The lenders, in essence, introduced a bunch of straw buyers into the real estate marketplace. Their argument for why they did it is essentially that the government made the incentives to make fraudulent loans so delicious that they just could not resist. See they love money so much, they just had to do it. In fact, the money got so good and it was so easy that they wanted to speed up the process of making money even more, so they started committing more fraud (robo-signing) to make the original fraud more profitable. Yes, my friends this is high level finance we are dealing with here -- mere mortals just wouldn’t understand this stuff.
Resulting scenarios in California and other “Sand States” work something like this hypothetical: New home development built in 2004 - 2006. 200 houses and maybe 25 of the buyers could really afford the prices they paid AND they made down payments. And then there were of course those unfortunate enough to believe the bank would not loan you the money if you really could not afford it. These folks believed in the integrity of “the system” -- how unfortunate! They were sold interest only loans and ARMs that they cannot refinance out of now and they MIGHT have been able to keep up with their home enough to still have their name on the deed. They can make payments for awhile but they really can’t afford the prices they paid-- that's probably about 75 people out of the 200. Now they all received appraisals supporting those prices based on sales of homes made to at least 100 people who clearly could not afford those homes at all. Those bogus buyers were in essence straw buyers that quickly lost their homes. So, almost six or seven years after those homes were built, about 125 of those homes have probably gone through some sort of process, short sale or foreclosure. And more than likely almost all of those 25 people who could afford those prices are still left among the 75 who are still struggling or are applying for a loan mod. Now if you paid $500,000 for a $250,000 house because you were defrauded and $250,000 is subsequently reduced from the principal, where is the reward? If a court were to pronounce that judgment, not many would say it was unjust.
Those 25 people who could afford the prices they paid of course still feel defrauded, as it will take 10 -12 years of payments to get their loan balances down to the home prices of today and they cannot refinance to today’s lower interest rates. So, of course, the temptation to walk away is high -- but only because it is cheaper and more expedient than trying to sue. In fact, lenders are now beginning to include language in their short sale approval letters requesting waivers over their very many legal issues on these files. And in some cases, they are paying home owners to do short sales in order to clean the slate. So they are, in essence, seeking settlements. So, in my view, government efforts to intervene with “programs” are efforts trying to create a mass settlement of these legal issues. Something everyone can live with so we can all recover and move on. And, I do not envy those who are living in a home, cannot afford to sue, and are waiting around for the government to save them.
Many people I’m helping never envisioned being in the position of waiting on the government for a solution. Many are people who have never even had a derogatory on their credit report before these times. The solutions offered damage their credit, do nothing to address the investment they’ve lost, and in some cases they can be asked to pay taxes whether they get a loan mod, allow a foreclosure, or elect a short sale! Not to mention people who have lost jobs because this whole mess has affected the entire economy. Believe me, it takes a lot before people will walk away from a down payment and 6 or 7 years of payments, and that is what I see a lot of people doing in 2012. My phone has been ringing almost non stop for the past two months for short sale consults.
Rewards? Hardly. Are you going to benefit as a free and clear owner of property? Probably through a stabilized housing market and a better economy, but not directly, no. I do agree that the whole things stinks. However, saying that people who are applying for government assisted re-fi’s, loan mods with principal reductions, and short sales are being “rewarded” is not exactly accurate. They are, for the most part, good people trying to do the best they can in a bad situation.
Tni LeBlanc is an independent Real Estate Broker, Attorney, Short Sale Agent, Certified HAFA Specialist (CHS), and Certified Distressed Property Expert (CDPE) and Short Sale and Foreclosure Resource Agent (SFR) serving Santa Maria, Orcutt, Lompoc, Nipomo, and Arroyo Grande on the Central Coast of California.
* Nothing in this article is intended to solicit listings currently under contract with another broker. This article offers no legal or tax advice and is for information purposes only. Those considering a short sale are advised to consult with their own attorney for legal advice, and their tax professional for tax advice prior to entering into a short sale listing agreement.
Copyright © 2012 Tni LeBlanc *In Defense of the Short Sale Selling, Loan Mod Applying, Principal Reduction Requesting Public*