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The psycho-babble was flying today. 

First it was McMillin talking the party line like an NAR booster in an article in the U-T, saying it is a great time to buy or sell. 

Then HW features more ivory-tower guys talking about the market, entitling the article: Homebuyer Demand All But a ‘Standstill’, but I couldn’t find where they actually used the word standstill in the text.  Everyone speaking with great certainty as if they know what’s actually happening, and the MSM soaking it up like it’s factual - with editors applying liberal interpretations to sex up the effect.

Here’s a view from street-level:

Editor:  Bofa keeps tip-toeing around the short-sale problem.  Their vaunted Equator platform has turned into a launching-pad-to-the-Black-Hole, and their ”appraisals” are coming in a solid 10% above retail, killing every deal that comes along.  Now they’re rolling out the pre-approved short sale package (that allegedly was supposed to have begun in April), and testing it with 2,000 people that they already ticked off while in loan-mod purgatory. It sounds like ploy to appear heartfelt, while wasting another six months:

From REO Insider:

Bank of America is launching a new cooperative short sale program that will target 2,000 pre-screened homeowners, said Matt Vernon, the REO and short sale executive at BofA.

In an exclusive interview with REO Insider, Vernon said the bank pre-screened these borrowers who have been considered for a modification under the Home Affordable Modification Program (HAMP) and a short sale under the Home Affordable Foreclosure Alternatives (HAFA) program. They have either fallen out of both programs or failed to qualify.

“The big question we’re looking to answer is customer responsiveness,” Vernon said. “These are not customers who are seeking short sales but rather distressed customers who are on the road to foreclosure, and we want to provide them an alternative. Our goal is to provide a tailored program with incentives that are attractive to homeowners experiencing a true hardship.”

Under this “test umbrella” for future programs, no new documents are needed from the seller since they already submitted their financial information to the bank.

BofA is also waiving deficiencies, or the difference between what the home sells for and how much is left on the mortgage. Vernon said his department will assign a short sale specialist to work with the real estate agent and the homeowner to market the property for 120 days.

Letters have already gone out to the homeowners, and they have 120 days to list the property. Vernon said they are looking at a six month program. The bank will be working with the homeowners’ real estate agents, meaning the bank will not be selecting agents to work with the homeowners.

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The ignorance prevails – I talked to the clerk at the association of realtors today, who said he has only heard of one case of short sale fraud.  I see at least one case every day!

From the sddt.com:

Short sale fraud is costing lenders hundreds of millions of dollars as short sales increasingly take the place of foreclosures as a solution for distressed mortgages.  Among properties involved short sales, four percent are resold within the following 18 months, and 1.87 percent are part of an “egregious flip,” according to a short sale research study released Aug. 10 by CoreLogic (NYSE: CLGX).

The study assesses the risk for lenders of short sale fraud. CoreLogic defines such fraud as “a transaction where parties involved in the process manipulate the short sale transaction and/or subsequent transaction for profit.”

As a clear-cut example, imagine an agent hired on behalf of a lender to make a sale, where the lender is open to a short sale. After receiving an offer from a would-be buyer, the agent then contacts a third-party investor to make a lower offer than that of the would-be buyer. The agent then submits only the lower offer to the lender. After negotiating the short sale at the lower price, the agent then negotiates a subsequent sale at the higher price between the third-party investor and the initial potential buyer. The agent and the investor share the difference in the price.

“The fraud I guess is when there’s collusion when going into a short sale,” said Mark Riedy of The University of San Diego’s Burnham-Moores Center for Real Estate.  Freddie Mac defines the practices as “any misrepresentation or deliberate omission of fact that would induce the lender, investor, or insurer to agree to the terms of a short payoff that it would not approve had all facts been known.”

Of all short sales nationwide, 55.8 percent took place in California, Arizona, Florida, and Texas. California alone accounts for 16.75 percent.

CoreLogic’s report defines a lender’s “unnecessary loss” on a short sale by the short-sale-to-resale percentage gain in price compared to the period between the two sales.  But Riedy says that’s too simplistic a qualification.  “If I go through short sale as an owner and told you what’s happening and this is the price, and you come in right behind it, it still might take six months to turn it because lenders take so long to agree to a short sale by going through committee,” he said.  Riedy also notes that a longer delay could work in the fraudulent party’s favor, as rising home prices might produce a stronger return six months from now.

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This chart makes it clear – servicers are pushing for short sales, instead of foreclosure:

This sounded like a big move:

Eric Friedman is leaving his post as senior vice president of default servicing for OneWest Bank, formerly IndyMac, and will become president of PREO, an online marketplace for REO and short sales.  Friedman, who held leadership roles with Fannie Mae and Countrywide, told REO Insider that his last day at OneWest is Aug. 13, and a search for replacement has begun. He has spent 20 years in the mortgage banking industry.

“PREO brings lenders, Realtors, homeowners and buyers together to turn distressed property back into family homes,” Friedman said.

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Is PREO just another website that combines foreclosure activity with MLS listings?

No, none of the properties checked were listed for sale, but all were on foreclosureradar.com’s NOD or NOT lists.  Most of them have IndyMac loans on them, and their bid prices are different than the amount owed – and usually well under!  It sounded like they have partnered with the lenders to offer these properties to the public, but not sure if it’s a glorified short-sale, or an actual open bidding process before, during, or after the trustee sale.

The website also mentions that it ”encourages defaulting borrowers to allow an inspection and interior photographs in exchange for the promise to relocate within 30 days after a bid is accepted.”

This could be the wave of the future – a website designed and run by insiders to liquidate properties directly to the public.  If the opening-bid amounts are legit, and buyers can get a peek inside the house prior to bidding, it could take off. 

They are realtor-friendly too, put my name down when registering:

www.preo.us.com

The astute observers can pick out the suspicious deals from a mile away.  But how do they play into the decision-making on the street?  How can you capitalize on the extra knowledge?

If there was an area that had a bad comp but had more good comps and was generally free of foreclosure activity (i.e. older areas), you might want to try to leverage the shady comp to justify your lowball offer.  But beware in areas that are ripe for future foreclosures (i.e. tracts built at peak), because those short-sale and REO listings are likely to be listed at a price that considers all sales as normal:

Citigroup reported last week, and so did Bofa – from HW:

Bank of America reported $35.7bn in nonperforming loans, leases and foreclosed properties in Q210, which is 15% above levels measured in the same quarter of last year.

These loans and properties increased more than $5bn in total aggregate balance since Q209. The total did drop by more than $200m worth of these loans and properties from the $35.9bn reported in Q110.  They represented 3.74% of all outstanding loans, leases and foreclosed properties at the end of Q210.

BofA reported $3.1bn in Q210 earnings despite losses in its mortgage division. BofA is continuing efforts to keep these troubled mortgages out of foreclosure. Since 2008, BofA and the acquired Countrywide completed nearly 650,000 loan modifications. During Q210 alone, BofA completed 80,000 modifications, including 38,000 trial modifications that were converted into permanent workouts under the Home Affordable Modification Program (HAMP).

If a modification does fail, BofA is putting an emphasis on selling the home through a short sale ahead of foreclosure. At REO Expo 2010, Matt Vernon, the short sale and REO executive at BofA said that the bank added 1,000 employees to the short sale staff and will “do everything possible to liquidate property prior to foreclosure.”

Short sales have to be the best device for those determined to kick the can down the road – the processing delays are already legendary, and many end up in the black hole of goo.  

IF the servicer gets pressured about making a decision, they can resort to ‘the big start-over’, and sell the loan to another entity.

Eric Wolff of the North County Times touches on it here, and below you can see how the closed short sales have been increasing this year:

After the vaunted ARM-reset chart, the Great Recession, unemployment through the roof, and state and local governments as broke as ever, many thought (including JtR) that by now we’d be in a bank-directed-sales environment only, with nothing but REOs and short sales.

But with the REO listings dwindling, the regular sales are enjoying a healthy resurgence - May and June regular sales were as high as they have been in a year:

If the banks’ intention is to make the liquidation of property as excruciating as possible in order to drag it out for years, they have found the magic formula - spit out a few trustee sales, and direct their defaulting borrowers to loiter around the short-sale bin.  This might take a while?

From HW, though it may sound somewhat familar:

Lenders are canceling more foreclosure sales in California than ever before, and new financial and political demand for short sales could be the culprit.

Lenders canceled nearly 22,000 California foreclosure sales in June, driven mostly by JPMorgan Chase. It’s a 27% increase from May, a 153% growth from a year ago, and an all-time high, according to ForeclosureRadar.com, which tracks foreclosures in the state.

Foreclosure sales can be canceled for successful loan modifications, short sales, a legal requirement, or even a filing error. In terms of strategy, a spokesperson for JPMorgan Chase said the bank has not made any policy shifts to cancel more foreclosure sales.

According to ForeclosureRadar, a certain number of the cancellations can be attributed to pending modifications and short sales, but homeowners and real estate agents have complained to the company of sales that were canceled without either.  “We have seen a shift over the last couple of months where homeowners want this process to be over and they want to start to rebuild,” said a spokesperson for ForeclosureRadar.

Researchers at the company received varying answers as to why the cancellations are up. The best answer came from one unnamed REO professional. According to the source, the Home Affordable Foreclosure Alternatives (HAFA) program had the most to do with the cancellations. The Treasury Department launched HAFA in April to provide incentives to servicers for conducting short sales and deeds-in-lieu of foreclosure to homeowners who fail the Treasury’s Home Affordable Modification Program (HAMP).

“Now that servicers have systems in place to administer the program they are removing delinquent loans from the foreclosure pipeline to allow a reasonable short sale time period,” the source told ForeclosureRadar. “Predictably (also my opinion) the period would be expiring just after the November elections so there would be less political blowback as those properties that don’t conclude with a successful short sale are taken to foreclosure and ultimately, REO.”

After foreclosure activity dropped across the board in May, new foreclosure notices increased 6.7% in June, and notices of trustee sale jumped 21%. In fact, notices of trustee sales have outnumbered preliminary notices of default for the past four months. The gap really widened in June, when there were almost 9,000 more notices of trustee sale.

But this trend could become the norm as banks have to restart more foreclosures than they initiate.

“Historically it is very unusual to have more Notice of Trustee Sale filings than Notices of Default” says Sean O’Toole, founder and CEO of ForeclosureRadar. “But with skyrocketing cancellations and the possibility of failing loan modifications, this will be increasingly common, as lenders are only required to file a Notice of Trustee Sale to restart the foreclosure process.”

Lenders pushed 23% fewer properties into REO status in June and 46% less than a year ago. The amount of properties that have received a notice of default but have not yet been scheduled for sale increased 8.8% in June, but further along the foreclosure pipline, inventory remains constricted. The amount properties scheduled for sale dropped 1%, and REO inventory declined 4.8% in June.

For those potential home buyers who keep hearing about the short-sale negotiator, here is a copy of a contract that was required to be signed in order to make an offer on a short-sale listing:

short-sale negotiator contract

The contract attempts to justify why the buyer has to pay 1% of the sales price to the SS negotiator.  These have become so common that they are like the booties – agents don’t think for a minute how this agreement might impact the sale, they just do it because everyone else is too.  It is a way for the listing agents to sluff off some of the workload, and make the buyers pay for it. 

Here are a couple of lowlights from the contract:

Because of Processor’s negotiation with Seller’s mortgage company(s), Buyer has opportunity to purchase Property at or below market value and the terms of the Buyer’s offer, including sales price, would not be possible without Processor’s administrative work and negotiation on behalf of Seller(s) and Buyer(s).

Buyer(s) involved agrees to hold Processor, Seller(s) and any and all real estate agent(s)in the purchase of the property harmless and keep them exonerated from all loss, damage, liability or expense occasioned or claimed by reason of acts or neglects of the Processor or mortgage, employees paid by Processor for the purpose of negotiating a short sale or discounted mortgage payoff on the subject Property.

Regardless how you might feel about such an agreement, if you want to make an offer, you gotta sign on the dotted line.