Email response to a client asking “why aren’t banks negotiating more short sales?”

Email response to a client asking “why aren’t banks negotiating more short sales?”

Hi Shawn & Jeff,

I wanted to comment on an email of Shawn’s regarding short sales.  Essentially the message is ‘why aren’t banks doing the smart thing and negotiating the sale of a vacant short sale’.  At least that’s how I read it.

At best, we are seeing 1 in 4 short sale properties listed in the MLS sell as short sales.  This is a vast improvement over the 10% or less from a year or two ago.  The short sales that do not close are typically foreclosed upon and ultimately marketed as REO’s.

So, while an empty property is an obvious waste of money…the formula for how banks make money (or avoid loss) is very complicated.

Short sales usually have a number of parties involved.  First there is “the bank” which is often just servicing the loan for some unidentified investor(s).  I have come to believe the servicing bank actually makes money by calling and mailing delinquent homeowners.  I can not imagine they are sending ALL THAT MAIL and making ALL THOSE PHONE CALLS at their own expense.  I think the primary point of contact (the servicing bank) makes money by not solving the problem.

Then, if you do get a genuine negotiation underway, there are commonly two underlying lenders, investors and typically mortgage insurance that all have the ability to make demands and veto the transaction.  The Mortgage Insurer (MI) will have to pay some portion of the insured loan once loss is known.  They will commonly ask the home owner to offer cash at close and sign a note for a portion of the loss.  This is often rejected by the owner because they either don’t have the ability to pay, or they would rather take their chances on whether the lender will really attempt to collect.

Which raises the question of recourse…the ability of the lender to pursue the defaulting borrower for the loss.  While California is a non-recourse state, 2^nd loans and refinanced loans (non purchase money) are exempt from this protection.  So 2^nd lenders are offered $2500 on an $80,000 debt and asked to release the borrower from future recourse.  If I were the lender I wouldn’t do that.  In fact, I’m surprised as many short sales close as they do for this reason alone.

For a short sale to close successfully, all these parties need to agree on who will lose how much.  The cost in manpower alone makes this of questionable value and benefit to the lender.  I think you could make the argument that the holder of the first loan might be better served by foreclosing (relatively simple in California ) eliminating all the other parties and selling the property at a full market value.

We spend a lot of time telling our clients about short sales and their complexities.  But nothing beats personal experience for getting the real scoop.

Bill