FreedomCM heard that Bank of America has stopped doing short sales in Nevada – is that a good idea?
The whole idea is a slippery slope – once lenders allow a few homeowners to sell short, doesn’t it create the classic moral hazard?
Today there are MORE PENDINGS THAN ACTIVE LISTINGS in San Diego County. Let’s look at how many are short sales in process (the calculating is a little tricky, but I think this is accurate…..well, as accurate as the Sandicor MLS can be):
| Det & Att | Total # | Shorts | Percent |
| Actives | 8,922 | 1,087 | 12% |
| Pendings | 10,845 | 5,494 | 51% |
| 09 Solds | 15,890 | 1,960 | 12% |
Sure, there are plenty of short sales that are pending, it’s because they take so long to process them. We just received approval this week on one that we started five months ago!
The number of short sales closing each month are on the rise:
You’ll hear people say it is cheaper for a lender to short sale, rather then foreclose, but I’m not so sure.
1. The agents are driving the list prices ultra-low to make a short sale attractive to buyers.
2. The staffing needed to underwrite the sellers’ financial packages aren’t needed when foreclosing.
3. The additional number of debtors who could make payments, but are gaming the system.
The short-sale specialists include a clause for lenders to sign that releases the homeowner from liability on recourse loans, and I guess the banks are signing them. The debtors are getting off virtually scott-free.
Lenders should stop allowing short sales, and foreclose on anybody who can’t, or doesn’t want to make their payments. It would ease up on staffing requirements, streamline the liquidation, and probably put more money in lenders pockets.
BRAVO!! IT IS TRUTH!
“Lenders should stop allowing short sales, and foreclose on anybody who can’t, or doesn’t want to make their payments. It would ease up on staffing requirements, streamline the liquidation, and probably put more money in lenders pockets.”
Jim, you rock!
“The short-sale specialists include a clause for lenders to sign that releases the homeowner from liability on recourse loans, and I guess the banks are signing them. The debtors are getting off virtually scott-free.”
You DO rock, Jim! Thanks for the analysis and truthful comments…
With my last short sale the bank(WaMu) refused to give up the right to recourse. We were advised by attorney not to sign because it gives them the right to recourse even if they don’t legally have it. Seems that if the second and the first are both owned by the same bank there is the “merger of interest rule” In that case there can be no recourse from the second since the first forced the sale (upon itself). It is however almost impossible to learn who owns the second unless they foreclose. It is such a slippery slope that I am so done with short sales. We will all wind up getting sued when these lenders decide to collect on their debt and we didn’t make it clear to these sellers that they are going to get hit down the road. They all think it is so much better than foreclosure and it is not. .
Now THAT’s telling it like it is.
Let’s hope that what happens in Nevada doesn’t stay in Nevada. 😉
Speaking of WAMU…….this one really irks me. Google Congresswoman Laura Richardson (CA) and Washington Mutual. Apparently she didn’t pay her mortgage payments. WAMU foreclosed and the home was sold to a buyer who proceeded to do rehabbing and fixing. Apparently Richardson claimed the foreclosure was unlawful and prevailed upon WAMU (of course it didn’t have anything to do with the fact that she was a member of the U.S. Congress) to RESCIND the foreclosure. WAMU bought property back from the buyer, repaid his expenditures and other costs (take a guess what those were for) and gave the home back to Richardson. This was reported in several articles in the LA Times. According to sources, WAMU declined to discuss the case. Whoever heard of a foreclosure recission???
Yes the short sales are a bunch of BS.Foreclose and get on with the show.The short sale business is a total scam.
I’d love to see short sales end, but I think it would be more productive and beneficial (while we’re considering hypothetical policy changes) to end the bailouts and subsidization of banks. If the banks were less worried about keeping their meal-tickets happy and more worried about staying financially solvent, a large number of the other inefficiencies would simply go away. Banks would be strongly disincentivized from allowing long, drawn-out short sales because it would hurt their bottom line, which they would care much more about if they weren’t just passing the losses through to the US taxpayers.
That’s some bs, desert realtor. It’s amazing that they let her get away with that crap. Some serious ethics violations and illegal crap happening with Ms. Richardson.
Short sale or foreclosure, as a potential buyer, I would like to see the process streamlined and expidited. On the flip side, the powers that be have adopted a ‘spread the pain’ policy. So we’ll probably see another kind of foreclosure moratorium or other marked hinderance in the near future to prevent a potentially shocking price discovery.
Once all of the PPIP’s and TALF’s are exausted you’ll see capitulation by the banks and more foreclosures. I have a whole cubicle row of co-workers with downpayments waiting for that day.
Till then the banks will hold out hope and mark to magic.
Can’t see it happening. The time and expense it takes for a bank to foreclose is much more costly than a short sale near current values. At a 2% monthly decline in resale values the bank would lose 25% waiting for all the stages and eviction time, not to mentioned the house could be stripped of anything of value. Moral hazard yes but still a better deal to short sale the property, this is where most of the upper end properties will be changing hands in my opinion.
We will all wind up getting sued
Thanks Irene for summing it up nicely.
Can you imagine the judge’s conversation?
“What did you get out of this short sale?”
1st lender: “Lost $150,000”
2nd lender: “Lost $100,000”
Seller: “Some extra free rent, and bad credit”
Realtor: “Six percent”.
If we are properly counseling our clients, realtors could kill the future of short sales ourselves.
You are so right Jim…. as usual.It really makes me sad that these sellers think the bank is doing them a favor . They have every intention of selling that loan to a collection agency and coming back when these people least expect it. Short sales are the gift that keeps on giving… or taking!
This was an awesome post, Jim.
Let’s get on with the foreclosures! 🙂
“You are so right Jim…. as usual.It really makes me sad that these sellers think the bank is doing them a favor . They have every intention of selling that loan to a collection agency and coming back when these people least expect it. Short sales are the gift that keeps on giving… or taking!”
Yes, that was part of what I referenced in a post a couple of days ago…hubby, over morning coffee, commented that he wouldn’t be surprised when the 2nd and Heloc holders that still had a course of action, would sue the defaulters, get judgments, and everyone that thought they’d gotten off scot-free would be really surprised.
Jim, did you see this?
http://www.kpbs.org/news/2009/jul/07/local-real-estate-market-confusing-both-buyers-and/
quote from Matt Battiata,
“Are we at the bottom? Absolutely not, in my opinion. We’re, in my opinion, two years from the bottom. I think once we hit the bottom, it’ll take at least two or three years just to get back to the prices we’re at now. So now you’re talking 2014 or ’15, and another three or four years probably to get up anywhere near where we were at at the last peak.”
Found this description on Redfin today…
“PLEASE DO NOT SHOW. OWNERS HAVE DECIDED TO DO A LOAN MODIFICATION.”
Price $565k (listed Jan. ’09)
Previous Purchase $740k (Aug. ’06)
It seems as if listings have dropped way off lately, and in the mid to high end, anything that is anywhere near a realistic price is almost certain to be a short sale. The rest are just delusional.
http://latimesblogs.latimes.com/laland/2009/07/la-county-may-default-rate-double-last-year.html
The percentage of Los Angeles County mortgages delinquent by 90 days or more in May was nearly double the rate last year, First American CoreLogic reported today.
May’s 9.5% delinquency rate for L.A. County was up from 5% of mortgages late by 90 days or more in May 2008. First American bases its foreclosure analyses on public records.
While the default rate has nearly doubled, the number of homes actually being sold at auction — the final foreclosure stage — has shrunk. In May, the L.A. County repossession rate was down to 1% of mortgages, from 1.1% a year ago. This discrepancy is the “foreclosure backlog” now looming over the housing market. It’s caused by various government-mandated and voluntary foreclosure moratoriums, and possibly by lenders trying to manage the flow of repossessed homes entering the market.
Nationally, First American reported 6.5% of mortgages were in default in May, up from 4% in May 2008. The national repossession rate was 0.7% in May, up from 0.6% in May 2007.
— Peter Y. Hong
Sorry!
I should have clarified that I was speaking about listings in the greater LA area.
Finally! It’s good to see everyone’s in the boat I’ve been floating for the last couple of years. Deadbeats are deadbeats they won’t change the best thing we can do for them is to foreclose on their property and get a paying homeowner in asap. It really is this simple.
I’d like to see a good breakdown of costs for a foreclosure vs a short sale.I am just not seeing how it is so much cheaper for the bank to take a short sale rather than foreclose.Everyone who is underwater will want a short sale.If you were underwater 200k on your house would you quit your job so you have a hardship?
A few comments: 1) The Moral Hazard issue is kind of a straw man. You can identify flippers/speculators or House ATM abusers and not do short sales with them. People who have lost their jobs and need temprorary relief are different. Not everyone who defaults on a loan is a “loser” or a “deadbeat”. Some have had adversity come their way that has little to do with the housing market itself. A little compassion is a good thing there. And, the banks aren’t blameless, remember? Loose lending standards, and the fact that traditional mortgages are non-personal recourse means that’s the deal the bank struck. If the person can’t pay (because the loan was always beyond their means) or won’t pay, then the bank must partly blame itself.
2. As between a short sale and a foreclosure, I would always prefer to buy a short sale. We’ve all seen the damage that outgoing owners do to a house that’s been foreclosed on. A short sale, by contrast is a negotiated deal. Does the fridge and the tile and the whatever convey? Check the sales contract. The owner may not be happy about a loss of a downpayment (if any), but the finality of a real sale (even a short one) is better than the nastiness of a foreclosure.
3) As for the agents and their role in this, if they are indeed driving the prices low with below current value short sales, then banks would appropriately reject them. If what we’re assuming is the banks aren’t real good at managing their assets and determining if the price being offered is at market, then what we’re really saying is that the national banks aren’t really good at this, and maybe they should leave the mortgage business and people should return to getting loans from local banks (if any still exist).
I don’t think this is so cut and dry. Maybe the short sales are driving prices down and there is a moral hazard but it seems that it can be practical.
I think of someone who’s business is down, a spouse laid-off and just can’t keep the home, but, also doesn’t want to default on their debt. They go the short sale route.
Some will game the system, hopefully most will not. That’s a big risk and a lot of energy for someone who is just gaming.
These sales should take a long time, should be scrutinized and should be on a case by case basis.
They need to stop the suffering and FORECLOSE on all the “victims” that we’re “tricked” into a mortgage.
Mozart – you said:
I think of someone who’s business is down, a spouse laid-off and just can’t keep the home, but, also doesn’t want to default on their debt. They go the short sale route.
Isn’t a short sale defaulting on a portion of the debt? I know sdrealtor over on Piggingtons explained that sometimes sellers show up with checks to cover 2nds or HELOCs – but if they’re paying off the FULL amount they’ve borrowed, it’s not a short sale, is it? It seems like if the seller isn’t paying back the full amount they borrowed, they’re defaulting on at least part of their debt.
Am I just confused?
Former RB Resident-
Remember, some of those who were employed during the bubble years were making WAY more than their skillsets allowed for. I know too many jr loan officers with 12mo of experience that made 10k/mo and had failed out of HS. In a world without bubbles, they would have NEVER made that much.
Yes, some legitimate people have lost jobs, some were lucky for a couple years while the money flowed everywhere.
Dafox,
Well, you sort of conflated the issues there. Yes, mortgage brokers who were raking in dough while the bubble flowed aren’t really worthy of sympathy. But, what about the laid GM worker or QCom worker? Its kind of hard to place the blame at their feet if they lost their job, the house isn’t worth what they owe and they want a way out.
The bank has a few choices here. They can do a loan modification, approve a short sale, or foreclose. They should do whichever of the three causes them to lose the least amount of money. This could be any of the three-it will be different for each individual house. They might also guess wrong-that is, they could pass up on a short sale and foreclose, but in the time it took to do that, the market fell further and they would have been better off doing the short sale.
Now, there are definite moral hazard issues all over the place here. But that’s true with foreclosures as well as short sales and loan mods.
Thanks Myriad.
More snippets from same piece:
BATTIATA: Yeah, okay. Yeah, we do – I mean, I’ve done hundreds and hundreds and hundreds of them over the last few years. Doing a short sale – a loan modification does not affect your credit. That’s – Although you do have to be, you know, pretty significantly behind in your payments before the bank will consider a loan mod.
From further down in the piece:
BATTIATA: You don’t owe the bank any money. You’re not signing a promissory note, it’s a done deal. The short sale itself, that debt settled for less than the amount owed, that is a, relatively speaking, minor impact on your credit.
For a guy that’s done hundreds of short sales, he sure seems to be ignoring the recourse/collection aspect.
That comment by Battiata struck me as well. But in fairness he said the shortsale doesn’t affect your credit, but, that being behind in your loan payments definitely does.
Sorry, Compassion has no place here. When someone makes an investment, they take on risk. Right? If there is fraud involved, go after the fraudsters.
If not, please explain how I can be made whole with some bad stock purchases I have made.
If you desire to be compassionate, do it yourself. Don’t expect your neighbor or the taxpayer to share YOUR compassion.
Capitalism is Dead.
The shortsale does affect credit in that it adds a line to the account stating it was settled for less than the balance owed. Whoever reviews the file assigns whatever their criteria is to the item.
“and another three or four years probably to get up anywhere near where we were at at the last peak.”
Battiata is an optimist. SD County is not Silicon Valley, where there’s a “next big thing” new technology waiting in some techie’s fevered imagination for its chance to launch another boom. Where is the economic engine that is going to replace all the unsustainable jobs that were “created” here by the smoke and mirrors of the housing bubble? Without that, simple inflation won’t bring prices back up to “where we were at the last peak” until sometime around 2030.
formerRB:
2. As between a short sale and a foreclosure, I would always prefer to buy a short sale. We’ve all seen the damage that outgoing owners do to a house that’s been foreclosed on.
This is where the banks should be bringing in JohnLaw. Thrashing the asset for a loan is a crime. Or handle it in civil court and get a judgement that will get paid if the homesquatter gets a job.
Agreed, Tanta wrote a great piece a few years back on why short sales aren’t as good for the bank as they seem. There’s a narrow window where it saves the bank money vs. foreclosing, and that’s before we even consider the fraud and moral hazard issues.
And Gene SD is far behind other cities in what I’ll call “capital” amenities.
Wife and I went into a store the other day that would have been full of illegals/lower class consumers back east. But in SD it was middle class white folks who shopped there.
Not a good indicator.
FreedomCM-The problem with that is that it’s (usually) hard to tell if the homedebtor was the one who damaged the property or some random thief/vandal/bum/gang member who did so after the homedebtor left the property.
Re damage: Also, when there is no sales contract, things like appliances may or may not be considered fixtures, depending on the law where you live. But, taking the fridge and the washer and dryer are relatively small potatos. Taking tile, columns, doors, whatever, or doing physical damage with a sledge hammer, is something else.
FBI: U.S. Mortgage Fraud “Rampant” and “Escalating”
http://www.calculatedriskblog.com/2009/07/fbi-us-mortgage-fraud-rampant-and.html
These combined factors uncovered and fueled a rampant mortgage fraud climate fraught with opportunistic participants desperate to maintain or increase their current standard of living. Industry employees sought to maintain the high standard of living they enjoyed during the boom years of the real estate market and overextended mortgage holders were often desperate to reduce or eliminate their bloated mortgage payments.
Mortgage fraud continues to be an escalating problem in the United States and a contributing factor to the billions of dollars in losses in the mortgage industry.
***
Short-Sale Schemes: Short-sale schemes are desirable to mortgage fraud perpetrators because they do not have to competitively bid on the properties they purchase, as they do for foreclosure sales. Perpetrators also use short sales to recycle properties for future mortgage fraud schemes. Short-sale fraud schemes are difficult to detect since the lender agrees to the transaction, and the incident is not reported to internal bank investigators or the authorities. As such, the extent of short sale fraud nationwide is unknown.
Thanks Ronald.
Scooped again by CR, tough to stay ahead of him!
Jim,
I have purchased a home this year (March) and it was a short sale. I am incredibly excited about it and am looking to raise our two young boys there for a very long time. As I was reading the comments of others, I became concerned for myself regarding the short sale. In asking the question to my realtor and the loan professional if I could ever be held liable for the “short” balance of the home they assured me it could not happen since the original loan that was to be shorted was not in my name. Since I am the owner of the home now (the same address of the loan that was shorted) could the bank come looking for that money from me?
Thank you for your time.
I started my short-sale purchase in May, and it took me just over 1 month to close, which apparently is pretty quick. I think it was because the loan amount was pre-approved because someone backed out at the last minute and I was the first one to scoop it.
oops, I meant the ‘purchase price was pre-approved’ by the owner’s bank
Neil, You’re fine.
You’re a busy guy, Jim. I don’t think CR’s out there making ice cream truck videos and selling homes.
Jim,
Hearing it from you sets me at ease. Thank you for taking the time to respond to my question.
Correct me if I am wrong here but if a lender agrees in writing to forgive, relinquish, or charge off an amount of the total loan the borrower owes it would seem entirely incredulous that after the deal is closed for them to come back to the borrower and say “umm, we were just kidding, you know that $200K we said we were forgiving (in writing), well, were going to throw you a curveball and start judicial court proceedings to recoup it all”
A short sale is just that folks. Once the bank agrees in writing to do a “short” they cannot legally come back to you and say they were just kidding unless there are extenuating circumstances and, even then it’s unlikely.
-spartacus
“Correct me if I am wrong here”
If you have a recourse loan, unless the lender/s specifically sign up to a non-recourse short sale the sale will only relieve you of the portion of your debt that is covered by the sale price and you will still owe the rest.
It’s amazing to me after perusing many of these sites, that homeowners would ever expect to default on an obligation (mortgage/promissory note) and expect to not have repercussions.
Everyone’s situation is a little different, and speaking in generalities about the process of extricating oneself from a home purchase gone negative, is foolish.
If a homeowner has a purchase money first mortgage only, in a state with non-recourse laws, then shame on the Managers of the banks that actually issued loans that would allow people to “walk away” scott free under non-recourse loans. Greed has it’s penalties and stupidity will have repercussions whether you are fortune 500 bank, or an individual.
Otherwise, a short sale may be the best option for a homeowner to live up to their fiduciary responsibility to repay as much of the obligation as possible to first and/or second lien holders. Full payment was the deal signed up for. If you cannot make full payment a homeowner should make as many reparations as possible, not inflict more economic damage by living as a mooch freebie and forcing foreclosure, or worse, damaging stripping the home (collateral). It’s not good for a homeowner, the community, or the country.
Of course lenders may want to recover additional moneys, as is their right, after execution of a short sale transaction. If a homeowner is able to negotiate with a lender(s) to accept lower than amounts owed, either in the short sale process, or in the recovery process, then good for them. In my opinion, this is not “stiffing” the lender, it’s renegotiating a deal gone bad into a mutually acceptable solution.
While all parties involved usually must share the pain, it’s a far better scenario than a foreclosure.
For the record, my situation is:
-Wife broke foot, out of work for 2 years, ate up 1/2 of retirement savings
-My income dropped due to recession
-Work wanted me to be “more geographically attractive” and move to another state
I cannot hope to pay back all that I owe, but I will do my damned best to minimize the losses for all parties, including my lenders.
I OWE it to them.