BANK SHORT SALE TACTICS CREATE BILLIONS IN LOSSES

The deluge of short sale activity has acquired a distinctive flavor - Buyers are increasingly investors seeking to buy and flip or buy and rent for positive cash flow.  Missing from the field are homebuyers seeking a place to live.  Why?

Banks Encourage Short Sale Investors and Discourage Retail Buyers

Let's look at the basic premise of a short sale.  The lender generally has a loan in or near foreclosure and likely it is non-performing.  The owner determines that continuing to make the payments has become financially irresponsible or impossible.  The owner also determines that avoidance of a foreclosure by attempting a short sale is the preferable method of disposition of the property - if the lender holding the mortgage lien(s) agrees.

The lender generally will agree to a short sale provided it will realize an amount from the sale that meets or exceeds the amount it would realize from a foreclosure, netting out the associated costs of a foreclosure and resale of the property from its REO holdings. [Note - the costs associated with a foreclosure sale have been reported as about $58,000 for the average FannieMae loan.]  In actuality, the selling process is a trilogy - a three party (or four party if there is a 2^nd mortgage) arrangement involving the buyer, the seller and the mortgagee (lender).  For detailed comment on this issue see The Short Sale Trilogy.

 Next, let's look at the goals of the buyer of a short sale.  There are two types of buyers. 

             The Retail Buyer - this buyer is buying to find a place to live.  The retail buyer is looking for value, may be a first time buyer or may be coming out of a mortgage foreclosure, divorce or other situation. But value is not primary in the list of selection of the residence and other parameters such as neighborhood, number of bedrooms, condition, age and amenities are also important considerations.  Likely the retail buyer is renting the present home, be it a house or apartment or condominium. Each of these retail buyer profiles have a common thread, usually a factor of time.  The retail buyer needs to acquire the new housing within a certain defined timeline, usually because the lease will otherwise have to be renewed, or other family or financial issues mandate the new housing be acquired by a certain date.

             The Investor Buyer - this buyer is buying to make money.  The investor buyer is looking for value too, but much more value than the retail buyer.  Usually the investor has one of two goals - or both.  One is to resell the property (sometimes immediately) upon its acquisition.  The other is to acquire the property at a price that allows a positive cash flow when the property is rented. [Note that this calculation takes into consideration the actual cash income AFTER expenses such as realtor fees, vacancy rate (time rented vs. time it is vacant), cost to maintain the property, insurance, property taxes, and cost of capital or value of capital.]  Based on our experience representing retail buyers and investor buyers, the investor price is going to look like a bargain compared to the retail price the retail buyer is willing to pay, and it is not unusual for the price differential to be 30 to 80 percent lower for the investor buyer compared to the retail buyer.

 A government study on the valuation of foreclosed properties published in 2004 called "The Value of Foreclosed Property: House Prices, Foreclosure Laws and Appraisals" if you are interested in the formula.

 So it makes perfect sense for the lenders to encourage sales of properties the lender is willing to short sell so that they are attractive to retail buyers. 

 But that is not what is happening.  Just the opposite, the lenders discourage the participation of retail buyers in the short sale process and instead encourage transactions with investor buyers at prices as much as half what the retail buyer is anxiously willing to pay. 

 Why the retail buyer is blocked from the short sale marketplace.

 As stated before, the retail buyer is on a timeline.  It has a start and a finish and usually the finish is a definite date at which time the retail buyer must make a financial decision and a housing decision.  When the retail buyer enters into a contract to purchase a residence the time to close (approval time) is a most important factor.  Other property offerings are likely going to come and go during the time the short sale process moves through the lender and there comes a time when the buyer terminates the contract for another opportunity.  When a retail buyer contract is submitted to a lender for a short sale approval we typically see a time to process of 90 to 170 days.  Timelines like that completely discourage a retail buyer from continuing with the contract and thus, we generally see the same property put to contract several times - frustrating the lender, the brokers and the sellers.  Usually (but not always) the final sale price is lower than the original contract price submitted in the first go around with the lender.

 Lenders are taking a loss on short sales that are literally breaking the bank.  Bank failures are on the rise and some analysts say that there will be several medium size bank failures in 2008 and early 2009, with one report from a major news organization citing sources that there will be at least one more major lender go bust.  FannieMae and FreddyMac are serious contenders for national takeover (and the resultant loss of equity to all of their shareholders) because of the billions of losses they are experiencing.  This is too serious a problem to just talk about.  The lenders need to immediately address the problems with their short sale procedures.

 Short Sale Lenders create an obligation to conduct themselves responsibly.

 Lenders are always telling me, "We don't have to do this short sale, we are doing it as an accommodation to the borrower".  But, that statement reminds me of an old and true adage that says, "if you are going to do something you might as well do it right."   Another more legal approach is, "if you undertake to perform a duty or service, you create an obligation to perform the duty or service in a manner that is not negligent or irresponsible."  At this point in time, with few exceptions we have found that the short sale lenders have created "loss mitigation departments" or short sale negotiators whose sole purpose is to handle and process applications for modification of loans and short sale transactions.  We have also found that within the same lender the practices and timelines are wholly inconsistent, even if the lender has distributed procedure outlines and timelines to those that represent the borrowers seeking the services of these departments. 

 A prime example is one major lender we dealt with this spring.  We sent in two short sale contracts on the same day.  The seller and the lender was the same in each transaction and the financial documents submitted were identical.  The neighborhood was the same in each transaction - in fact the properties were within 500 feet of each other and both were multi-unit rental properties.  We started calling to follow up the contract submissions within 10 days of submittal. 

 On property A we were contacted by the lender's representative the next day, the appraisal was ordered and within 24 days we had the approval for the sale, which then closed within 30 days.  Total time was less than 60 days from contract submittal.  We had asked that lender representative to takeover the property B file but it was not in his control to do so. 

 On property B, by the time property A had already closed we were still awaiting the appraisal from the lender, then the file was transferred and the process began again.  120 days later the buyer withdrew from the contract.  Around the same time the lender's representative said the seller (not the property) was not qualified for a short sale.  180 days later the broker is still looking for a new buyer.  This example may be extreme, but certainly it is not uncommon and in fact, it is probably more the norm than the exception.

In conclusion.

Realtors must do short sales to keep a flow of business in this market, especially in depressed markets like Florida, Nevada, and California.  But many rightfully cringe at the prospects of having to endure the work and frustrations that usually accompany working with the mortgagees, including multiple contracts and multiple buyers.

There is talk within lenders of procedures and timelines and some even publish these procedures and timelines.  Regardless of published procedures and timelines, the lender representatives are working on individual standards (which may be interpretations of the lender's procedures) and there is no norm by which consistency can be promised by any lender.

Until there is a recognition by the lenders that if they are undertaking programs to allow the short selling of properties, they should structure programs specifically for end purchasers and for investor purchasers, the market will naturally settle to the lowest value because of long drawn out uncertain results.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE   561 689 6660   RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com