In the previous post, we saw that second mortgage holder Bank of America was willing to take nothing now, and allow the first lender to foreclose – rather than accept $10,000. Let’s examine the possible reasons why this happened.
1. Banks are stupid – a crass generalization that deserves more depth.
You could speculate that banks/servicers are making faulty policy decisions, but usually where I see ‘stupid’ decisions are from those clerks on the front lines – people who are buried with files and aren’t able to make quick decisions accurately. Some are buried with files and can handle it, others can’t, and if this B of A decision was a mistake, oh well, it’ll probably be absorbed. B of A was the actual lender, not just servicer – on the tax rolls they were the bank that funded the loan, and was the decision-maker, according to the LA.
2. Banks are backstopped by U.S. Government
You could imagine a few conspiracy theories here – that B of A might have some sort of incentive to lose money, but because will have to wait for the book/movie to expose it, we’ll be a little short on specifics today. Let’s add, this wasn’t a Countrywide deal, Bank of America was the lender of record in November, 2007 when this $100,000 second mortgage was funded on top of a $900,000 first mortgage that Empire Mortgage Co. had funded in March 2006 (and likely sold off by now?).
3. B of A has recourse, and will pursue borrower.
Irene mentioned in the previous comments that lenders will have recourse for the duration, and I don’t see them waiving it for short sales – especially on seconds. Let’s be clear about one critical component – there are no reminders to borrowers coming from the realtors about future recourse. NAR, CAR and the local realtor boards have done very little to instruct realtors about the possible future liability of recourse loans. As a result, everyone is just pushing to close a deal, and not many folks are demanding that the lenders waive their recourse. I appreciate any views from the attorneys here, and thanks CA Law for bringing it up.
4. Banks are having a change of heart about their “gentleman’s agreement”.
Rob Dawg mentioned it early on that the big lenders/servicers will likely play nice when it comes to settling these disputes between first and second lenders, because on the next deal the shoe will be on the other foot. Most cases over the last few months have had the first mortgage holder paying the second $5,000 to $10,000 to go away nicely, and this is why the listing agent was mad – it didn’t happen in this case.
Possibility #4 is one we will be following closely, because I don’t expect that a major lender is going to make a statement on CNBC that they are waging all-out war in their race to the exits. It will only be seen by examining individual cases and stringing together a series of events to learn what the lenders/servicers are thinking.
I’m pretty sure about this – they will be firing all their guns at once in 2010, and it may not be that obvious to the casual observers. We’re expecting more NODs to make it to the auction list, more trustee sales executed instead of postponed, and the REO listings to increase slow but steady, all while the powers-that-be are frantically pushing loan mod programs that may look and sound good, but aren’t resolving anything.
Brought forward from previous comments:
The suggestion that BofA has some method to what they do seems speculative at best. More probably than not, BofA’s motivations will depend on whether they are the servicer as opposed to the owner of the second, the terms and conditions of their servicing agreement, whether mortgage insurance is in play, the number of files the asset manager has in question, what the asset manager has been eating for breakfast lately, the particular relationship between this particular asset manager and his lower level boss, and perhaps, but not likely, what this particular asset manager located in some unknown state understands about California deficiency law.
My experience to date is that I have been unable to confirm that BofA is not dumb, and JTR knows what I mean. Even assuming that BofA has some high level policy from up high on recourse issues, the translation of this policy into intelligent action on the lower levels is, to put it charitably, inconsistent.
We are living in the wild west on these short sale transactions.
By ‘Kingside’
I’d suggest possibility #5 — BofA knows exactly what they are doing and is actively making certain that a competitor will take a much bigger hit that erodes what’s left of their financial stability.
This is an industry full of shark filled waters and the biggest shark gets to pick what’s for lunch.
Apparently Rick Sharga over at realty trac has capitulated on his “shadow inventory tsunami” theory:
“Fortunately, Mr. Sharga does not anticipate a sudden flood of foreclosures hitting us anytime soon. There are some who worry about banks releasing a backlog of properties on the market at one time. However, they are having enough trouble keeping up with the properties they currently have.”
http://www.washingtontimes.com/news/2009/nov/13/charting-the-market/
2 years ago, neither Sean O’Toole @ foreclosure radar, Rick Sharga @ realty trac and Mr. Mortgage all believed there would be a shadow inventory TSUNAMI – none of them belived a the drip, drip, drip theory of foreclosures to stabilize the market would be possible.
O’Toole capitulated early, said he was wrong, and its going to be drip drip drip for another year.
Now, after stubbornly refusing to admit he was wrong, Sharga suddenly reverses course and goes drip drip drip too.
That leaves us only with Mr. Mortgage – who has holed up somewhere on some site that doesnt allow comments so no one can call him out on his failed predictions. (remember his infamous “the quickening” video)? Apparently, he has pulled this video too. Like a wounded animal, retreating to his den, Mr. Mortgage pulls his videos and no longer allows comments.
So with O’toole and Sharga, its now 2 down 1 to go. Will Mr. Mortgage ever have the decency to come clean and admit he was wrong, or will he remain true to his permabear roots and just dig in a little further – we shall see…
If you really think that BofA understands what is going on here, you have more faith in them than I ever will. There are any number of drones manning these desks and they have a protocol to follow. Jim is right about these short sellers not being told the tax and recourse implications of these sales. Mr. and Mrs. seller believe that the bank is agreeing to take less than the mortgage amount. They are not.. and in almost all cases they will reserve the right to recourse. My office has tripled the legal budget for next year because we have had so many agents not fully disclose this to sellers. The attorneys will be very happy soon.I always have the sellers take the settlement sheet to an attorney to explain just where they stand on this.I have only been successful once with getting the bank to remove the “recourse” language. That was Wachovia… Scary stuff!
Thanks Jim,
I saw the opportunity to get a good thread going and took it. Hope you dont mind. While it is clear in a non-judicial foreclosure the case law regarding recourse on short sales involving purchase money (i.e. non recourse) loans is very incomplete and frankly has not been tested. It will no doubt be battled in the courts over the next decade particularly once the economy recovers. Most lenders and attorneys beleive it will fall in favor of the borrowers and thus many issue solid releases on purchase money 1st mortgages.
Where the lenders are going after borrowers now is on the recourse/refinaced loans, as they should. The direction given to loss mitigation negotiators at lenders is very different with these loans. Borrowers usually have the opportunity to buy a release today for 10 to 50 cents on the dollar. Banks arent stupid and understand that recovering 10 to 50% today is better than the uncertainty of collecting down the road.
The Realtors on this property were likely commenting on the things they have heard on the street – that the 2nd should be happy getting 10 cents on the dollar. If it was a purchase money loan, they probably would have. But the property was refinanced to the tune of more than $300,000. This is not a low end neighborhood and the owner either had substantially earnings at one time and likely has good earning power ahead. Why would BOA walk away from that?
If a loan is true non-recourse (purchase money for 1-4 unit owner occupied aka CCP Sec 580b protection), I don’t think a lender has a shot in hell at legitimately getting recourse against a borrower through a short sale. California’s Supreme Court has previously ruled that in all but “non-standard” purchase money transactions, 580b is non-waivable. DeBarard v. Lim (1999) 20 Cal 4th 659.
So those uninformed servicers who try to get recourse against a consumer through the short sale process where it didn’t have it before, will likely be getting sued for what are called Rosenthal act violations (California’s fair debt collection statute which incorporates the Federal Fair Debt collection act). I will take those cases all day.
I doubt many recourse 2nds are going to discount the loan 90%. Just get a judgment for the full amount – earning 10%/yr interest on it by the way – and start garnishing wages and raiding bank accounts. And lien any future real estate purchase. Kind of poetic, isn’t it?
sika,
I think you forgot Patrick…
http://patrick.net/housing/crash.html
BTW since the market is doing so well you should put all your money in Housing and Stocks.
dacounselor… don’t forget… all that wage garnishing goes by the wayside with bankruptcy.. They should take the $10,000 and move on. They were in second position and that is why they received higher interest… more risk. Then when the risk comes home to roost they complain about it.Like I said… The lawyers will all be happy next year.
That’s correct Irene. Assuming a 100% BK rate, the lender will come out ahead by taking 10 cents on the dollar. But I doubt anyone is operating under a 100% BK model or anything close to it. You could have a 90% BK rate and at least break even. It’s unlikely that there will be a high enough rate of BK’s to render a policy of enforcing judgments less profitable than a 10 cents on the dollar policy.
I doubt lenders/servicers are conducting academic analysis about recovery rates on sold out junior liens. Much if not most of this paper are in securitized pools. The negotiater on the front line involved in processing a short sale is far removed from the person who may ulimately try to recover on the unsecured note. I think there is opportunity for short sellers to get out of a recourse debt through a short sale, but the other side of that coin is the cancellation of debt issue which will result in them getting 1099’ed for forgiven debt at ordinary income rates.
If last cycle is any indication, most of this recourse paper will not be held or brought to judgment by the holder, but will be sold off at a discount to collection specialists. Even the non-recourse debt will be sold off, even though it is not legally collectable.
http://www.irs.gov/individuals/article/0,,id=179414,00.html
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Relief under the 2007 act only really works for purchase money loans and rate and term refinances. If it is a cash our refi, it probably won’t qualify.