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Tanta, you are one great observer.
I guess she does not share my view:
Anna Schwartz blames Fed for sub-prime crisis - Telegraph
(my view is that Even Poole now join MIshkin in encouraging "consumer spending".
How can such two intelegent people fail to see the real problem in US economy:
The trade deficit is not going to come down until the US starts to save more and spend less. In 1992, consumer spending was a little over 65% of GDP. It is now closer to 72%.
Savings are down from 8% in that time, to barely above zero.
If US consumers simply saved 5%, as we did 10 years ago, the trade deficit would come down by a lot.
The solution is to raise rates, let home prices come down and the economy will move again while saving will increase.)
i have been looking for stuff about the history of the mortgage industry lately. i came across this paper, which is vaguely on topic, though a bit old:
http://www.freddiemac.com/news/pdf/fmwp_0403_servicing.pdf
damn, animated haloscan ads in the comments are annoying.
This is absoultly not fair. How much work do people expect from us for only 6% of the sales price.
But Dr. Baen of the University of North Texas is optimistic about their futures. "These people are hustlers...
Always a job in the world's oldest profession. Especially for the pretty ones.
this paper, which is vaguely on topic, though a bit old
Well, shoot. You had me all excited because I thought you'd found one of those "green screen mainframer" things that makes me feel young again.
That paper is from 2004.
hey that's before i was working for a living.
Tanta,
What you say makes sense however, might the take away be (if such ideas got wider reach than just CR readers) is that if it looks like you are going to have to do a short sale, the best thing you can do is stop paying on your mortgage first. When you drop your listing price below mortgage balance, erase the mortgage from the list of bills to pay.
is that if it looks like you are going to have to do a short sale, the best thing you can do is stop paying on your mortgage firs
Dirk, that's just it... as Tanta and others have oft opined, these "owners" want to get out of their house WITHOUT brining a check AND without ruining their precious credit score.
It's so not fair that they have to get hurt at all by this messy foreclosure/short sale process.
Money for nothing... and your chicks for free.
YTL
"Just exactly how often does an arm's length market produce a short sale price that is so much better than a foreclosure auction price? Why does it do that? You might want to think about it for a minute."
Tanta, great post as always, but this line here was especially poignant for me. It was one of those "Eureka!" producing sentences...
You have a knack for discussing the PRACTICAL of how/why the mortgage lending industry "works" the way it does.
Thank you.
Did I mention that the above line was really something?
The reason you have to go through "eight" or more people before you can talk to someone seriously is simply because these outfits think you are going to ask them to analyze or think about something they don't want to think about. So their first line of defense is to try to stop your asking. "Go away and don't bother us."
this one is related, if anyone is interested:
http://www.fanniemaefoundation.org/programs/jhr/pdf/jhr_1102_lacour-little.pdf
What you say makes sense however, might the take away be (if such ideas got wider reach than just CR readers) is that if it looks like you are going to have to do a short sale, the best thing you can do is stop paying on your mortgage first.
The take away, as far as I'm concerned, is that if you're going to play chicken, you have to play chicken. Chicken has risks to everybody.
I'm not going to go on record telling people to quit making mortgage payments in order to put their servicer over a barrel. For one thing, the servicer is still going to demand to see pay stubs and bank statements and order your credit report. If you really and truly cannot afford to keep making these payments, you should be able to produce documentation that makes that clear. If you just willfully refuse to pay a legal debt in order to induce the lender to accept a loss, you'd want to think about how you might explain that later to a judge who is contemplating slapping a deficiency judgment on you.
Sorry to sound all Pollyannaish and everything, but we're at the point where honesty is your best policy. 'Fess up to the servicer, hand over the documents, and go from there. I didn't say you couldn't get a servicer to agree to a short sale for a non-delinquent borrower. I said it was going to take more than five days.
What everyone is forgetting here is that FC losses are often as large as they are because the owner doesn't cooperate (doesn't vacate, doesn't maintain the property, contests the FC in court). Well, if you are asking for a short sale, you do come off as a "cooperative" borrower. This will change the servicer's calculation of what a foreclosure would maybe cost it. It's rather hard to make a servicer think "huge FC expenses" on the one hand and "honest borrower making honest short sale tender" on the other in the same deal.
The operative cliche from the perspective of the lender is : "Better the devil you know..."
Anyway, I think it is time for a Realtor® cram back clause forcing agents to disgorge a portion of their proceeds from a transaction that results in losses to the lenders or sevicer. Make it sliding scale and cap it at say three years or whatever but get them thinking like an expsed party and we'll see a classier group of salespeople driving paid off Hondas rather than leasing BMWs.
[Off to Disneyland to gauge the SoCal economy and possibly the impact of 108 Yen and 1,49 Euro.]
Tanta,
Nice post,
Still I think this is just noise, gravel on a dirt road to somewhere so to speak. I still don't believe that this bubble was created unexpectedly. The powers that be knew what they were doing.
A great ponzi scheme on the backs of foriegn investors by tanking the dollar?
I just can't get my head around it yet as I am not an expert and follow this as a hobby. I just don't believe this is all an accident.
Thanks
Foreclosure is a rather automatic process vs: a short sale. SOMEONE has to OK a short sale and that means SOMEONE is saying right out loud that he's making a decision that will cost the lender money. Therefore: FC will always be the CYA preference. Nobody ever lost a job by choosing IBM.
Rob, do they still sell those Mickey Mouse sour balls at Disneyland? best. candy. ever.
It's rather hard to make a servicer think "huge FC expenses" on the one hand and "honest borrower making honest short sale tender" on the other in the same deal.
Unfortunately works in reverse as well. It's hard to get a borrower to aggressively pursue a short sale when the alternative could be 10 months of no house payments of any kind except utilities versus admitting to mortgage fraud, keeping up payments and bringing a check to the closing. The thing the bank has to remember is that they are the rational party in this situation. What does game theory say about rational parties playing chicken with irrational/emotional/desperate counterparties? Nothing good I'm sure.
Tanta,
I think you're missing the forest for the trees.
Gretchen's article had a simple premise. Based on a survey of Realtors, she observed great complexities and difficultes faced by underwater homeowners anticipating defaults and evaluating short sales instead.
Realtors offered specific ideas to simplify and speed up the process, so that nobody (homeowner, lender, neighbors) have to suffer the problems created by foreclosures.
Okay, Realtors aren't popular on this blog. But the suggestions they offered to the NY Times sounded pretty reasonable.
The article balanced out all the difficulties of short sales with their benefits. Even so, it suggested streamlined short sales could benefit everyone.
In many words, you've explained well why today's industry isn't condusive to streamlined short sales. So what? The point of Gretchen's article is that things can change...must change.
Just what the financial services need -- more sales people with a track record of blowing up their customers.
Realtors offered specific ideas to simplify and speed up the process, so that nobody (homeowner, lender, neighbors) have to suffer the problems created by foreclosures
Rich, there is no situation in which nobody has to suffer. A short sale is suffering. The idea is that you can prove it is less suffering.
You are ignoring my point, which is that servicers only "avoid suffering an FC" when they believe they might have to suffer an FC. And they only accept "the best offer the market will bear" when they believe that it is the best offer. They're just supposed to take a relitter's word for it? Have you ever heard the phrase "sweetheart deal"?
How are you going to "streamline" the process and still be in the realm of loss mitigation?
Nobody in Gretchen's article came up with one single solitary useful idea for "streamlining" the process, as far as I can see. They just demanded that it move faster. Well, if we're talking making it move faster by making operations more efficient, give me some examples of how that would work. If we're talking just make it move fast enough for some buyer to catch a falling knife, count me skeptical.
So which part of the process do you want to jettison? And why?
Would these Relitter Phone Hustlers be the ones that are exiting the business in droves, going BK while their million dollar real estate portfolios go into foreclosure?
I know a few of those . . .
It's interesting the way losses tend to add up and the market gets sticky-- there doesn't seem to be an equilibrium point where everyone looses a little and moves on. Instead, you get 50 percent losses and everyone trying to emerge with skin mostly still attached to carcass.
Tanta, if you aren't familiar with (or don't know ?) Jack Guttentag, check out his website sometime. Have a great day.
Your Page Title
People on this board are buying the spin Tanta put on it, which is that these "premature" short sales are being instigated by Realtors.
That may be the situation in some cases, but it's not what Gretchen was writing about in this article.
She was addressing short sales instigated by underwater homeowners.
Realtors were brought into the article only because: 1) they were quoted in a survey; and 2) they offered constructive suggestions that the author felt had merit.
The implication is that Realtors are pushing this agenda because they are greedy hustlers. But it's not an implication made or suggested by the article itself but rather by the blogger, without supporting facts.
So how does our typical borrower, in the context of this intrusive, one-on-one process, avoid self-incrimination with respect to exaggerations of income, occupancy, etc.? Even if the lender is past caring, those admissions are going into an electronic file, subject to discovery. See, this is where "streamlining" can really expedite the process.
If you look at the two operating phrases, they are "jingle mail" and "turn inside out".
What the low life borrowers and brokers are saying to the bank is "allow the short sale or we destroy the house".
If lenders had any sense they would not only put as many black marks on them as possible, but they would prosecute them criminally for attempted extortion.
Blow the worst offenders away in a very public fashion and the many will think twice before they play games.
they offered constructive suggestions
How about you quote one from the article? Just one will do.
"This should go faster" is not a constructive suggestion.
"The implication is that Realtors are pushing this agenda because they are greedy hustlers."
No, it seems to me that would be your inference. With which, by the way, I'm in agreement. I've had 'professional' relationships with realtors for many years, and in many states, so my agreement is based on experience rather than conjecture or something a neighbor may have said.
Then you misread the article. The article emphasized erasing complexities and uncertainties for homeowners and transmitting information faster, not moving transactions faster.
One problem is that the online version of the article (the one linked here) is an abbreviation of the whole article published in print by The NY Times. Here is one Realtor's suggestion from the printed article:
"Answer their phone, make it easier to talk with the appropriate people, instead of playing Mickey Mouse games. I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents who are trying to sell these homes."
Got a problem with that?
Tanta has it nailed.
The shortcuts that got us into this mess (streamlining the buying/underwriting process) won't be the one that gets us out of it.
The process has to be done, if it's streamlined on the way in, well it will get vetted on the way out.
And isn't there anyone anywhere who has a moment to blow thinking about the buyer in a short sale?
Is it OK to screw some rube who can be brought to sign a contract for a damned sight more than the REO would list for?
If the buyer isn't a rube, just a normal buyer making a realistic offer, then what's the big yank here? How long does a "normal" RE transaction take?
If the buyer is a professional RE investor looking for a bargain, that buyer isn't going to be shocked by going through the rules on a short sale process.
If the buyer is some scum bucket trying to take advantage of a distressed seller, then doing all this in a big hurry would be a great idea?
And the lenders realized they got screwed in this streamlining on the way in,
I don't really expect to hold still while the realtors give it to them again on the way out.
I worked in risk management and collections for a good long time.If someone wants me to take a loss on a deal,I want to know why,and I need to be able to justify it in order to keep the auditors happy.So yes I want docs,and pay stubs and everything else that shows the borrowers financial condition,especially since I know that fraud was rampant in the underwriting process...That said the risk management teams can do a lot of analysis by region and loan type,and come up with sensible procedures to handle the inevitable increase in short sales and FC's.It is no secret which areas are hardest hit,and it is not too difficult to get a handle on price trends and current values for those areas,or to determine the borrowers risk profiles based on employment type,etc.FC losses can also be quantified to a reasonable degree.In other words a rational decision can be made more quickly if a little effort is expended.
Terry,
There is no question that Realtors are going around to underwater homeowners and suggesting short sales. Clearly, this is profit-motivated behavior by Realtors. But if the Realtor has done a competent assessment and believes it may be in the homeowner's best interest, is there anything wrong with it?
We are again talking about how individual people and families in deep financial trouble can find a way out.
If an ethical Realtor can be helpful in that process (maybe even offering to cut his/her commission to share in the pain) is there anything wrong with it?
Most people on this board think all Realtors should spend some time in hell. But are you willing to offer a path of redemption for the righteous?
I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents who are trying to sell these homes
Can anyone think of a reason why a servicer would make it harder for a deal to get done by a realtor on the phone, instead of by direct contact with the borrower at all times?
How many people reading this blog would sleep better knowing that their mortgage servicer was willing to cut a deal with a Realtor in a few days in conversations to which they were not a party?
How about if some dood who runs some "Foreclosure Prevention" "WE BUY HOUSES FOR CASH" outfit can just call up your servicer and make things hum along quite quickly without the servicer doing any due diligence?
You know, we all love "speed." But I could take all this a whole lot more seriously if someone did, indeed, explain clearly what these RE brokers want. Don't tell me they "want someone to answer the phone." That's horseshit. Someone is answering the phone, and someone is explaining that it will take more than five days.
If the servicer really and truly isn't answering the phone, then it's not time for "constructive suggestions." It's time to call HUD and make a criminal referral. I understand hyperbole. I understand frustration. I do not confuse them with appropriate risk management.
Good news - Lawyers are getting fired. Maybe they can work in the call centers:
Open Thread — Law Firm Layoffs - Law Blog - WSJ
You people are all responding to an article in the NY Times that Tanta has written, not the article that the NY Times actually published.
There's not ONE WORD in the article about streamlining the short sale transaction.
It's an article about streamlining the process of connecting the homeowner to the loss mitigation department and starting the flow of information/communication.
But all the comments about the problems of shortcutting the transaction are good.
Is a Short Sale a Bargain? « SouthWest Florida Real Estate News
The concept of a short sale is great, but most deals are win/lose with both parties possibly thinking that it was a win/win. The idea that you can have a win/win/win/win is pretty remote. homeowner/buyer/servicer/owner. Not only do they all have to get a winning deal, but they have to think they got a winning deal.
I could see this happening in situations where the market is awful and a servicer has 100 REO's and is fully aware of the situation, maybe. Or when a local bank made and kept a loan. So the bank would be knowledgeable and motivated. However if the local market sucks and the bank kept mortgages, then they may have already tanked.
It's an article about streamlining the process of connecting the homeowner to the loss mitigation department
YES. That is what it is about.
That was why I responded by pointing out that there is no "streamlined" track to the loss mitigation department. If you are already in default, they don't refuse to transfer you to Loss Mit.
They are set up to be the ones who call you, you know.
It seems to me the only person in the transaction who actually knowingly benefits from a "speedy" shortsale is the Realtor, who is also the only one who will consistantly walk away with more than they started.
If the lender isn't motivated to "speed" up the process then oh well.
How bout you determine the Realtor comission by the months it takes to make the short sale happen (i.e. 1% if it's in a month, 2% if it takes two months etc.)
I wonder how many complaints about the process you'd get from them then. In fact, the realtors would be the first to explain and justify why it does and SHOULD take so long.
Example of a short sale....
Short-Sale @ Neo Vertika in Brickell » Miami Condos, real estate, Miami Condos Blog,Foreclosures, South Beach
Note that the buyer was an investor that then wanted to flip the place.
Neo Vertika Short-Sale Becomes a Closed Sale » Miami Condos, real estate, Miami Condos Blog,Foreclosures, South Beach
That said the risk management teams can do a lot of analysis by region and loan type,and come up with sensible procedures to handle the inevitable increase in short sales and FC's.
I don't know what the private investors are doing, but I do know for a fact that that's exactly what Fannie and Freddie and the MIs are doing, have been doing for months, and are going to continue to do.
But they're still not going to jump up and beg to be picked off. That's always a problem when you finally shove the salepeople out of the way and get the risk managers involved.
It seems that once you get over the fact that your credit will be dented, the thought process becomes easier. If you're in a non-recourse situation, I suspect you can milk it for at least six months.
Rich,
Your comments continually lead me to believe that you do not understand moral hazard. If a person can afford their mortgage, has significant savings, etc., but their home is not worth the price for which it can be sold, their demand for a simple short sale is nothing more than shirking the downside of risk! If their house sold for far more than they owe, they would surely take their 'equity' with pleasure. It is not in the best interest of our society to allow people to take on risk and then run from the consequences when their bets don't pay off. This is why the process which Tanta explains is so important. The process is in place to determine how much the borrower is capable of sharing in the losses.
--
Yal: How can such two intelegent people [on the Fed] fail to see the real problem in US economy
Brainwashing wins over native intelligence, e.g., high IQ, every time! During the past few days I have read 4-5 similar comments, Fed Is Not Stupid!, Mishkin is no fool," and this:
To be sure, the downside risks are considerable and a Minsky-type financial crisis remains a possibility. What prevents me from forecasting more gloom is that central banks have demonstrated their preparedness to do whatever it takes to maintain stable financial market stability. For that we can probably thank Ben Bernanke, who understands very well the lessons of the Great Depression.
This is idiotic. Fed created the household credit problem by helping build Debt Concentration Camps by crooks like Mozilo and now it will be the one to help solve it?
The real qualification to be appointed to the Fed is propaganda skill and be acceptable to the banking and financial crooks who love pushing debt (very profitable while the game lasts). Greenspan epitomized it. Greenspan was and is a below average economist. The banking crooks wanted Volcker out and peddled Greenspan. They knew what they were doing. The Era of the Debt Pushers had begun.
Let me see, the bad Fed gave us the Great Depression and now the good Fed will avoid even a mild depression? Any American who believes this kind of garbage must be ashamed. Unfortunately, shame is one of the many victims in modern America.
Blind faith in Fed is best the guarantor of prolonged economic misery in America and the world. One self-professed American philosopher, Elizabeth McDonald, said, Our ignorance should matter, but it doesnt [seem to]! Well, my dear lady, it will matter a hell of a lot within your lifetime.
Jas
Great post Tanta. They key to the unbalanced nature of the NYTimes article was that it never mentioned any of the rights of the lender that you've mentioned - one of which is that they have a right to demonstrate to themselves that the borrower cannot pay.
And the rest of your post about the need to ensure that the transaction is truly kosher was fascinating.
These realtors have really spun this haven't they ! So, now the deadbeat borrowers, instead of going cap in hand, "we're so sorry that we are only returning 84%(-realtor commission?) of your money" to the lender are now snarling : "Just be glad you get this much - it could have been much worse" and then are surprised that the lender says - "Let ME be the judge of THAT - at MY pace".
-K
--
From bacon dreamz link to Freddie Mac working paper: Building Assets, Building Credit: A Symposium on Improving Financial Services in Low-Income Communities, held at Harvard University on November 18-19, 2003.
A far more accurate title would have been: Pushing Debt, Inflating Asset Prices: A Symposium on Tricks to Legally Financially Rape Low-Income Communities. No? No need to save to own a home!
BTW, Mozilo made some famous remarks at this symposium.
Jas
jcsc,
It seems to be moral hazard gets baked-in when loans are made to unqualified people at high LTVs. Everything else is aftermath.
Step back and look from the perspective of a person living next door to an underwater home that can't be sustained much longer.
If it goes into foreclosure, you get weeds, vandalism, etc. The Times article included a lot about "people who take their homes with them" -- i.e., vandalize their own homes.
If it goes to short sale, you might only get a new responsible neighbor.
So, are you (being the homeowner next door) willing to pay thousands of dollars in lost equity, misery and maybe fear for your children's safety to insure that our great nation does not succumb to moral hazard? I don't think so.
This board usually has great perspective. But at times it gets into "pack think" and this time is one of them.
We've got a giant problem to solve here, collectively and individually. It will take creative people and solutions to solve it. If Realtors can go from being part of the problem to part of the solution, I think it's great.
The thing the bank has to remember is that they are the rational party in this situation. What does game theory say about rational parties playing chicken with irrational/emotional/desperate counterparties?
Well, one possibility is always that the servicer (or the MI) makes a counteroffer. In other words, deed-in-lieu, with or without cash payments from one party to the other. I can think of situations in which I'd respond to a short sale tender by just agreeing to take title.
One problem here is that the RE broker doesn't profit from a DIL.
I think the point that the relitters are trying to convey is if the short sale doesn't get approved quick enough the buyer is going to be underwater on the house before the short sale is closed. The knife is falling so fast the banks are going to have to (phone) hustle to get a borrower to be in position to catch it.
Tanta...I must be close to you...I wish to bear you a child.
I can certainly understand why lenders are reluctant to allow short sales until there is evidence that the current owner is unable to afford their current loan.
However, I think that the mortgage servicers are missing one big point: any home that is under-water is at extremely high risk of default REGARDLESS of whether the owners are capable of keeping current on payments.
If the only offers a seller is able to get are for less than the value of the mortgage it is almost inevitable that the home will go into foreclosure at some point if a short sale isn't possible. Lenders are clearly living in some fantasy-land where just checking the financial health of the borrower is what should matter when determining loan restructuring.
It's all about the market value of the property. At some point the lenders are going to have to come to the realization that they need to take action on reworking loans, or allowing short-sales, to anyone and everyone who's house is worth less than their obligations.
"If a person can afford their mortgage, has significant savings, etc., but their home is not worth the price for which it can be sold, their demand for a simple short sale is nothing more than shirking the downside of risk!"
If the loan was originally a non-recourse loan (backed by only the collateral of the property itself) then there is no fraud or hazard.
The bank knew it was a non-recourse loan going in and it's their job to price and underwrite accordingly.
It's a job, i.e. work. Not just free money from the spread between their privileged connection to the Federal Reserve System and the retail market.
Do owners of an asset-backed securitization trust on the capital markets think that a default is a moral problem and they'll go back and sue for core capital of the issuers, even if it's not considered part of the assets backing the security?
No.
Capital markets option market makers do give somebody full upside with limited downside. For a price.
PS: the investors in FNM and FRE should think accordingly as well. Non-recourse to the Treasury.
PPS: lenders, ever hear of "down payment"?
It's some fancy new technique that a nerdy quant group with physics PhD's just came up with at JP Morgan's risk department. (A bit later, one of them was pursuing his hobby of purchasing ancient books and found some 15th century reference in Ladino to this nifty idea.)
With this scheme, a borrower will certainly lose some of his own money in a short-sale, sharing risk with the lender, and aligning their economic interests more closely. If they want one nonetheless, then there really is a problem you need to deal with.
"There is no question that Realtors are going around to underwater homeowners and suggesting short sales. Clearly, this is profit-motivated behavior by Realtors. But if the Realtor has done a competent assessment and believes it may be in the homeowner's best interest, is there anything wrong with it?"
Don't lose sight of the fact that the realtor is the only party who walks away from a short sale with more cash than s/he arrived. There are vanishingly few realtors that have the competence to accurately assess what's in the home owner's best interest; I won't go so far off topic as to address the ethics.
Realtors need a streamlined process because, in part, the repo man is looking for their Benz.
That's how it works in my corner of the world, anyway.
From 2004 Freddie Mac working paper:
Although only anecdotal evidence exists of California borrowers ruthlessly using their option to default through moral hazard rather than involuntary inability to repay, the Fannie Mae experience suggests that allowing deficiency judgments at least reduces the incidence of foreclosure when home values decline.
Workout options have been widely adopted throughout the mortgage industry, and home retention workouts have risen dramatically in recent years Workouts have risen dramatically in all three cases. In 1996, roughly 30 percent of problem loansthose 60-days delinquent or worse that did not reinstate on their ownat Fannie Mae and Freddie Mac were resolved with a home-retention workout alternative.13 By 2002, the two companies resolved about 50 percent of problem loans were resolved via workouts.
http://www.freddiemac.com/news/pdf/fmwp_0403_servicing.pdf
Workouts might work fine when prices were rising during 1997-2003 (data in the paper), but in falling home prices, California borrowers ruthlessly using their option to default through moral hazard will become the option of choice nationwide the borrower exercises the put option (from the same report).
The empire built on pushing debt will collapse like a pack of cards.
Jas
From 2004 Freddie Mac working paper:
Although only anecdotal evidence exists of California borrowers ruthlessly using their option to default through moral hazard rather than involuntary inability to repay, the Fannie Mae experience suggests that allowing deficiency judgments at least reduces the incidence of foreclosure when home values decline.
Workout options have been widely adopted throughout the mortgage industry, and home retention workouts have risen dramatically in recent years Workouts have risen dramatically in all three cases. In 1996, roughly 30 percent of problem loansthose 60-days delinquent or worse that did not reinstate on their ownat Fannie Mae and Freddie Mac were resolved with a home-retention workout alternative.13 By 2002, the two companies resolved about 50 percent of problem loans were resolved via workouts.
http://www.freddiemac.com/news/pdf/fmwp_0403_servicing.pdf
Workouts might work fine when prices were rising during 1997-2003 (data in the paper), but in falling home prices, California borrowers ruthlessly using their option to default through moral hazard will become the option of choice nationwide the borrower exercises the put option (from the same report).
The empire built on pushing debt will collapse like a pack of cards.
Jas
Raise your hand if you're an ethical realtor...
crickets
I thought so.
Tom said: " I worked in risk management and collections for a good long time.If someone wants me to take a loss on a deal,I want to know why,and I need to be able to justify it in order to keep the auditors happy.So yes I want docs,and pay stubs and everything else that shows the borrowers financial condition,especially since I know that fraud was rampant in the underwriting process"
This completely misses the point. The borrower's ability to pay is completely irrelevant. The only thing that matters is whether a given home has a market value for less than the mortgage: if so, the owners will just walk away and default, regardless of whether they are able to keep making payments. Eventually lenders will just have to come up with some sort of simple process where an ubiased appraiser is hired to determine if a home is worth less than the mortgage, and then agree to just rework the loan or do a short sale based on that. All the messing around with pay stubs and borrower financial assessments is just delaying the inevitable.
Lenders are clearly living in some fantasy-land where just checking the financial health of the borrower is what should matter when determining loan restructuring.
Are you sure about that? Are you really sure?
I know it's hard to accept, after the last several years, that there might be somebody in the back room at a servicer shop with some sense. Lenders haven't exactly done themselves proud lately.
But we are taking the simple assertion of a bunch of RE BROKERS that this is going on. Look, just because lenders can live in the Mouse House doesn't mean relitters can't.
I need a whole lot more than the simple assertions of a bunch of starving relitters before I accept as fact that short sales are not going on, are not going as fast as practically they can, and that lenders are not doing the math.
What we have in today's exhibit isn't even a couple of anecdotes we could pluralize and get "data." We have a questionably scientific poll of interested parties who were asked to share opinions. That counts for something, no doubt, but it doesn't convince me that it's only servicers who live in "fantasyland."
--
On Moral Hazard
The question of moral hazard doesn't exist is a society beholden to legalism.
There is only one hazard people need to worry about, or think about -- Legal Hazard!
Jas
This is idiotic. Fed created the household credit problem by helping build Debt Concentration Camps by crooks like Mozilo and now it will be the one to help solve it?
They do have some new management.
The previous problem was Greenspan's fault. Specifically his ideology of radical anti-regulation.
You ought to expect that some bankers will be like Tangelo, focused on immediate short-term profits, which means volume at any price in a blowoff asset bubble.
It was Alan Greenspan who intentionally refused to crack down on lending standards and checking underwriting security and honesty, even though this is one of the primary and most essential jobs of a central bank.
The reason is none other than an immature Ayn Rand fanboism (most sensible men outgrow this by the time they can shave regularly) combined with massive REIC greed. Along with a political class who thinks just like them.
(Individually each bank is competing with the next for the marginal dollar. The same motivation for environmental standards, you don't want a race to the bottom where the honest players get outcompeted by the greedy scum.)
Alan Greenspan's to blame for the dot com bubble as well.
The Fed had full power to raise margin borrowing standards. (Since the 1930's, not coincidentally).
Again, he refused, when it was obvious in 1999 it was needed.
Is a Central Banker smarter than a Bartender?
Every bartender knows the way to cut off a drunk is to remove him from liquidity, completely. Not by raising the price of beer by 50 cents every hour to everybody, drunk or not.
Rich,
It seems that being a journalist yourself you are intent on defending "incomplete" reports. If one looks at the original article it does not mention:
1) moral hazard 1 - homeowners want to walk away scotfree with their credit intact!
2) moral hazard 2 - relitters vested interests. As Tanta and others pointed out: are the still raking in 6%?
3) However much maligned the lenders are made out to be, what about their due diligence? Especially when a fast serviced loan defaults in 6 months. Are the relitters getting another 6% at that short sale too?
Lastly, I think you can remedy the situation by actually asking these probing questions for your next story, i.e, give both sides a chance to address the issue.
shendi
Semi OT:
I think few on this board would argue with the proposition that housing prices are going to go down significantly nationwide. My working figure is 25% from the peak in real terms. That may be high or low, but seems in the right ball park to me based on historical multiples of housing prices to income and rents. Using 25%, it translates to $5 T of lot wealth. It strikes me as a crucial question of what percentage of that loss will be borne by the homeowners and what percentage by the banks/IB's/hedge funds. I'm thinking about an 80/20 split homeowners/banks, but honestly that number is sort of plucked from the air. However, 20% of $5T is $1T. With $1 of bank capital roughly translating to $10 worth of loans, that means $10 T of less lending (not all in 2008, but over a few years, but a big chunk in 2008). That is a pretty significant figure in the context of an economy that in the 3rd Q was running at just under $14 T. Just as a point of reference the only time we have seen total loans and leases at banks actually fall year over year in nominal terms was less than 1% very briefly just after the end of the 74 recession.
Am I missing something here, and does anyone have a good way of quantifying the probable split of the losses?
This completely misses the point. The borrower's ability to pay is completely irrelevant. The only thing that matters is whether a given home has a market value for less than the mortgage: if so, the owners will just walk away and default, regardless of whether they are able to keep making payments. Eventually lenders will just have to come up with some sort of simple process where an unbiased appraiser is hired to determine if a home is worth less than the mortgage, and then agree to just rework the loan or do a short sale based on that. All the messing around with pay stubs and borrower financial assessments is just delaying the inevitable.
I beg to differ. As an appraiser, the last three short sales I've seen, the lender was paid in full. In two cases, the family of the seller contributed funds to pay off the difference; in the other, the realtor-seller brought funds to the table, even though she is facing bankruptcy.
Lenders will go to great lengths to squeeze blood from the stone, before they give it up as a lost cause.
Lemme see if I have at least some of it right:
Speed got us into this mess. More speed is not going to get us out.
sniglet,It is called due diligence,and you do it on the front end,or the back end.Or you get lawsuits.Real estate salespeople want to get deals done quickly both to get a commission ,and also because they know the supply of stupid but qualified buyers is shrinking rapidly,and that prices have a long way to go...In sonoma county prices have dropped officially 20% from the peak to a median of $500k,and we have a median family income of right around $54k...so it will get real ugly.Again if a lender does not perform due diligence when approving short sales they will lose the lawsuits brought by shareholders and investors,and it will cause people to get fired who won't be if they cya by doing on the back end what they should have on the front end.I think the best choice is probably to aggressively go for a deed in lieu of foreclosure and market the homes through Realtors who you build a relationship with in each MSA,get 2,negotiate commissions,and tell them the split of new listings is based on performance.
Victim profile.
Tom said: "if a lender does not perform due diligence when approving short sales they will lose the lawsuits brought by shareholders and investors"
Yes, I am all for doing the due dilligence to determine what the true market rate for the home is. Hire unbiased appraisers or whatever. Once you have determined that the home really is worth less than the mortgage, then allow the short sale. It's as simple as that. All I am saying is that investigating the financial health of the borrower is irrelevant. Once a home is worth less than the mortgage foreclosure is inevitable. No one is going to keep making payments on a home that has a negative value, even if the borrowers have mortgages that allow recourse. The reality is that all mortgages are de-facto no recourse anyway these days, since it is such a hassle going after the borrowers, most of whom don't really have many other assets anyway.
The borrower's ability to pay is completely irrelevant. The only thing that matters is whether a given home has a market value for less than the mortgage: if so, the owners will just walk away and default, regardless of whether they are able to keep making payments
I disagree.
Most on THIS BOARD are rational people. And we all can think rationally about paying top dollar for a depreciating asset.
However, I would argue that MOST regular folk are NOT rational in their financial dealings. If they were, they would not have bought a house at 15x salary as example.
Obviously, more and more "research" is supporting the idea that underwater homeowners will walk more than previously thought... however it's not 100% of them.
Thus, the lender must assess:
-what is the current value of the property
-what is the outstanding mortgage
-what is the borrowers financial situation
-what is likelihood the borrower will walk, and WHEN will they walk
-what is anticipated value of foreclosure sale today and when borrower walks.
If the homeowners clearly CAN'T make the payments, then obviously that would be fast-tracked to Loss Mit I'm guessing. (which goes along the HOPE program lines)
However, if the borrower can make payments, then the bank must decide IN IT'S OWN ESTIMATION whether or not they think the borrower will keep making payments (which is income for the bank by the way), and if so for how long
They must also then decide on what the property will be worth going forward when the borrower DOES stop making payments.
So a lender might NOT agree to a short sale on a borrower if they feel that they can get the borrower to make payments for a year before foreclosing, and that the housing market will be improved by then fetching a higher foreclosure sale that is higher than today's short sale offer.
Kind of like the World Bank that makes loans to countries who can never pay it back, so then it just keeps reworking the loans keeping the poor countries paying forever! Or like credit cards who love customers who keep revolving debt.
Tanta,
As one of your admirers from afar, I once again give you major props for a superb post.
In the "old days" a Presidential Administration responding to a national crisis raised the hue and cry for the best and brightest to drop what they were doing and come to Washington to serve the nation in its time of extreme need. The best insights and the best practical experience applied directly and succinctly to the problem at hand. Tanta, you deserve an immediate "call-up." To aid the current Administration, and future Administration, but also the Nation.
P.S. Because "Helicopter Ben," and the "Brain Trust" over at B. of A. (nee Countrywide) are so stubbornly dense and lacking crucially updated insight, they don't deserve to be answered by you if they happen to make the call. On the other hand...if the dollars were right.
The reality is that all mortgages are de-facto no recourse anyway these days, since it is such a hassle going after the borrowers, most of whom don't really have many other assets anyway.
So, fine. Fax your bank statements that prove you're broke to the servicer. How long does that take?
We're going through the same baloney on the back side that we did on the front side. Remember the stated income deals? Hell's bells, how long does it take to find your last paystub and your last bank statment and run them through the fax machine?
The big hold-up here isn't gathering the docs. It's figuring out why a servicer should accept a short payoff for somebody who could make up the difference in cash, but just doesn't want to.
I am not advocating making life any worse for folks who are having a true hardship. I know a lot of Loss Mit people, and they actually really feel good at the end of the day knowing they were able to help negotiate something that improves the finances of a struggling family. You are free to refuse to believe that, but decent ethical loss mit people are at least as common as decent ethical realtors.
The whole problem starts exactly when you want the "streamlined access to Loss Mit." Having to provide a few easily-obtainable documents does not constitute "hardship" or "bureaucracy." That's the same nonsense thinking that got us into this.
I have experienced a lack of appreciation for the time value of money. I have experienced a lack of appreciation for the ability of RE markets to adjust downward. I wonder about the extent to which those things have been responsible for servicers reluctance to approve short sales.
Just as a matter of interest, how long does it actually take to get connected to Loss Mit when you want to make a short sale? Assume I get an underwater offer on the weekend and at 9:00 on Monday I start calling the 1-800 number. Yes, I'm going to have to be transferred through eight people, but how long does that take? How much speedup would occur if I could directly call Loss Mit?
Tanta said: "Fax your bank statements that prove you're broke to the servicer"
Sorry, but I fail to see why your financial health or ability to pay is relevant. The vast majority of people who own homes worth less than the mortgage will default, regardless of whether they have the financial wherewithall to keep current on payments. If lenders just assume that 90% (or better) of all underwater mortgage holders will default then it is in their interest to re-work the mortgage, or allow a short-sale, as quickly as possible.
In fact, knowing the financial health of the borrower may only confuse the lender from what is really going on. For example, the lender might incorrectly conclude there is a low risk of default if they find the borrower has a good job and healthy financial balance sheet. The reality, however, is that it is almost certain that the borrower will default if their home is deeply under-water, even if their finances are ok.
The vast majority of people who own homes worth less than the mortgage will default, regardless of whether they have the financial wherewithall to keep current on payments
Evidence please.
Sniglet:
I'll use myself as an example:
If my house drops 30% in value (from today's value) then I will be underwater on my home loan.
However, I'll continue to pay my mortgage because:
1) my mortgage is less than comparable rent
2) my mortgage cost is less than 10% of my take home pay.
3) I love my house
I currently have enough cash in my ING/Emigrant/HSBC savings accounts to pay the mortgage in full.
thus, the bank would be wise to look at my financial statemetns if I called and asked for an expedited short sale. because I have cash to bring to the table.
The reality, however, is that it is almost certain that the borrower will default if their home is deeply under-water, even if their finances are ok.
Isn't that where the the IRS "forgiven debt=income" penalty comes in?
Well, Tanta, what about dealing with investors in a nonrecourse state like Arizona? Short sales here are a godsend to the idea that you can pass the buck on to the next investor pool and mitigate your losses.
There are a lot of properties hitting the books right now, so I believe that DILs are going to be discouraged, at least here.
Countrywide Foreclosures (REO) Blog
Shows BofA will shortly add 15K porperties under manglement to their own pile of properties, plus the current foreclosure stream.
I can hardly wait to see the number of qualified investors with 20-30% down who desire to catch a falling knife.
Give you an example, looked at fourplex in a crappy transitional neighborhood that is currently reo with amount TBD on WellsF's site.
They had a first for about 220k after foreclosure expenses for a 1959 structure that requires electrical, four ac units, doors, windows, and I haven't even got inside to see how bad the plumbing is. Bah, I estimate I can afford to pay no more than 80k, nothing down with 20k worth of improvements to get the four units up to code. Rentals are soft, so my estimated monthly income will only be
$1,500 (75% occupancy). Estimated profit would be a lousy $400 a month to pay back my 20k of improvement.
The funny part was the 2004 property tax valuation was 120k, yet the property sold on a 8.5% 30 year ARM in JAN 2006- a loan that was destined to fail.
I have not even bothered to call my realtor yet. Why? Cause they won't deal with reality at the REO outfit yet. Nobody is going to touch this with half a brain until it comes down to where I would want to buy it.
So it is gonna sit, and sit, and if the kids down the street break in and start squatting, then the price could end up down to 40k- now how big of loss do they want to own?
So much damage yet to come, and so little reality yet on the mainstream media or in the minds of the realtors.
Catch falling knives? That is for realtors, let the dust settle and some financing for the eventual owners (vultures like me) appear, and the bottom is in finally.
Someday this war's gonna end...
The reality, however, is that it is almost certain that the borrower will default if their home is deeply under-water, even if their finances are ok.
And the more you offer people a free put, the worse it gets.
Why wait 'til the RE market puts you underwater? Why not just go max out your HELOC, then ask for a short sale the next day?
Of course people who don't put any money down will likely (but not always) walk when they're underwater.
So who's this new borrower? Is the buyer making a down payment? Out of what? Should I care? Am I just going to be in the same damned mess again in six months?
You seem to be suggesting that the music necessarily stops here: we got the underwater borrower out of the property, now we have . . . what? A new owner with a 20% down payment from a reliable market value who won't walk on me too?
We just had a long discussion the other day based on a post on a mortgage broker board about a guy who was trying to buy the house across the street--by making a short offer--so he could turn around afterwards and default on the home he already owns.
What do you think the guy would do if and when the new home drops in value? Develop a conscience?
You're just talking about making the free put freer. I'm not getting how that arrests the free fall in RE prices.
dissident:
your "victim profile" was R-O-N-G, rong.
so rong that it doesn't even qualify for the "w".
You know, AllenM, I thought about you immediately when I read this crap about the "streamlined access to the Loss Mit Department."
Bless your cynical little heart, you're the one who always makes your mortgage payment on the 14th. And you always get a collection call. And it always annoys you.
You could probably get expedited transfer to the Loss Mit people. After all, the collections folks have some notes about you in their database!
Part of me is just endlessly tickled about this. Most people would be very happy to live their lives without ever getting a call back from the Collections Department.
Just as a matter of interest, how long does it actually take to get connected to Loss Mit when you want to make a short sale?
Are you a returning customer? Then type in your password and click here.
If you are a new customer, click here to set up your account.
It's just like Amazon, folks.
If you're already delinquent, or you have already called the servicer before you ever got that offer to tell them you're in trouble, then you'll already have a contact with Loss Mit. In fact, they might be quite eager to take your call, since it means they might have a resolution to your case.
If this is the first time they've heard from you, and they've never had any reason to call you first, it's going to take a while.
I don't think we're quite appreciating the underlying problem here. You are not likely to be able to skip all the steps and go directly to short sale.
Tanta,
Your point does bring up some interesting problems with the HELOC market that has not been addressed much in the MSM or here.
What really should happen to all that HELOC money that is now definitely underwater? There is obviously going to be some huge losses to the pools and banks that have these on the books when a first blows them out on a dil, short sale, or reo. But what about the neighbors? Would it make sense to ask borrowers who are not in trouble if they would like to prepay at a discount?
I am beginning to wonder if some very strange circumstances are going to appear in the desperate drive for liquidity that mortgage investing appears to be heading into.
If the holder of my heloc on my investment property purchased in Jan 2007 offered me a 50% prepayment discount I would be sorely tempted to mail them the money and get out of my monthly payment. Since the note is only worth 30 cents on the secondary market at most, this kind of recovery would make far more sense than allowing the note to keep going, even current, with the dropping values in the real estate market.
I will keep an eye on my mailbox.
Someday this war's gonna end...
Tanta wrote:
If you just willfully refuse to pay a legal debt in order to induce the lender to accept a loss, you'd want to think about how you might explain that later to a judge who is contemplating slapping a deficiency judgment on you.
Are you sure about that? Foreclosure courts are going to be overwhelmed. I tend to think you could slip through the system. You might want to empty your bank accounts first though.
And how would "willful refusal" be proven?
Tanta, how does a claim by the lender for PMI fit into all of this?
.
I'm usually a little surprised at how difficult it is for normal rational people to put themselves on the other side of the table, i.e., if I had loaned a fair bit of money to various people, damn straight I'd be unanxious to take a loss. And to make the process of people trying to put pressure on me to take the loss streamlined, hah! Granted, I might end up losing more on the deal, but they're demanding I actualize the loss now? I'd want to think about that long and hard first.
I gave them their fax to stop all phone contact, but it took a while.
Gee you would think they would like dealing with vultures like me, after all, I can pay my bills.
Of course, last week I was yelling at accounting about rejecting my $48 travel reimbursement for the last six months cause it wasn't on the right form. The Assistant Director I yelled at found out it was only for $48 bucks and said here I will pay you myself- the hand shot out and I said sure, but then he just said waste an hour and resubmit.
Someday this war's gonna end...
I tend to think you could slip through the system.
Maybe you can. Maybe you can't. Maybe you'll be the one selected to make an example out of.
You can't know. That was my point about playing chicken. It's not for people who want guaranteed outcomes.
If I can show the court a credit report that shows you were keeping up with all your payments when you stopped paying me, and I can get via subpoena the records from your bank showing you had the money, and I can intimidate your short sale buyer into admitting that he's your next-door neighbor who made a low-ball short bid to help you out, I can prove willful breach of contract.
Would I be motivated to do that? Maybe. But who you gonna believe? Your servicer? Your realtor? The people at the last cocktail party you attended?
Terry made the point earlier that there's an underlying assumption here that the relitters know what the current owner's best interests are and will always act in it. I am not so sure.
transient said: "If my house drops 30% in value (from today's value) then I will be underwater on my home loan. However, I'll continue to pay my mortgage"
Well, you would be exceedingly silly and making a terrible financial decision to continue making payments if your home was under-water. In such a scenario it would be possible to rent an equivalent place for much lower than your mortgage payments, and staying in the house is just accepting a large liability that you could easily get out of with little more than a tarnished credit rating. Even people like Jim Cramer are advising people with under-water mortgages to walk away. In any event, I suspect you would be in the exreme minority who would be willing to continue making payments.
Tanta, how does a claim by the lender for PMI fit into all of this?
The terms of the MI policy are that the MI gets to review any workout and consent. So it's another layer of review. It is not necessarily a great big long drawn-out one, since the servicers know what the MIs require and will be wanting the same due diligence themselves. But it is perfectly possible that the servicer just wants the problem to go away--not mess with FC--but the MI puts a stop to it because the MI is the one who writes the big check to the investor.
Terry made the point earlier that there's an underlying assumption here that the relitters know what the current owner's best interests are and will always act in it. I am not so sure.
Tanta | Homepage | 01.13.08 - 2:43 pm
What Terry actually said:
"Don't lose sight of the fact that the realtor is the only party who walks away from a short sale with more cash than s/he arrived. There are vanishingly few realtors that have the competence to accurately assess what's in the home owner's best interest; I won't go so far off topic as to address the ethics."
I may have been confused with Rich.
Uh, oh....
Terry, I guess I should have said "Terry made the point that there's a false assumption that"
I didn't confuse you with Rich.
Sniglet, I am officially calling you out as a troll. Every single generalization you have made is empirically wrong. Your assertions about how "everyone" will act appear to be simple psychological projections from your own troubled self.
AllenM, you should not yell at people in accounting. It is counterproductive and not nice.
Bacon, I was disappointed at the negligible numbers of fired lawyers in your link. It will get much worse very soon.
Everything depends on whose perspective we're talking about.
For those homeowners who are contemplating living in their home until they get foreclosed so they can save and save money in the meantime then the longer the short sale process and the foreclosure processes take, the better. As the properties pile up the process will take longer and longer. Depending on the state it is possible to live "mortgage and rent free" for quite a while. This will give homeowners a great head start with assets to start over again.
Those who have cash will make out as a bandit when all this crap is finalized. It'll be a while.
Rich,
I have a much larger vested interest in ensuring the health of free markets than I do in keeping all of the quadrupled value of my home. People who are allowed to benefit from risk taking and to then dump the costs of the downside onto their communities or society as a whole, do not learn the lesson of risk taking and often continue to take on too much risk, ie moral hazard.
Too many people (not just borrowers) took on too much risk. Dealing with the consequences of risk gone bad is a valuable lesson that we will ignore at our own peril. So I absolutely believe that losing 'equity' because of the default next door is preferable to the destruction of free markets.
Well, you would be exceedingly silly and making a terrible financial decision to continue making payments if your home was under-water. In such a scenario it would be possible to rent an equivalent place for much lower than your mortgage payments ... In any event, I suspect you would be in the exreme minority who would be willing to continue making payments.
Not necessarily -- I've been contacted by several homeowners and lenders looking to refi out of a bloodsucking ARM reset, but the value has fallen just enough to preclude the possibility. Some are at 0% equity, some are $10-20k underwater. I advise these homeowners to talk to their lenders about a mod, maybe starting with the HopeNow program. Rents might be slightly lower, but not more than $200-300 per month less than a reset payment.
Most upside down homeowners do not live in California McMansions, and many of them owe $80k on a house in Kansas that's now worth $60k. Walking away is the best choice for some -- toughing it out is best for many others.
albrt,
I was hopping mad for reasons that won't be discussed here. But when their idea of customer service was to laugh in my face, I thought my threat of selling them to Accenture for process re-engineering was justified. I don't care if it would make them worse, they would suffer, which would make me feel better.
'nuff said.
Someday this war's gonna end...
Thanks Tanta, I also bet some of this 'delay' is PMI claim related.
Unfortunately, from what I gather, some insurance business lines have gotten to the point where they deny almost every claim and then wait for the lawsuit (ie: use the three D's: Delay, Deceive, Deny).
In some cases, it's almost like a shopper going to the grocery store, buing food, then having it confiscated at the exit door and getting a note saying 'sue us if you want your groceries back'.
It wasn't always that way, but w/ all the fraud, it is chronic now.
.
People on this board are buying the spin Tanta put on it, which is that these "premature" short sales are being instigated by Realtors.
I don't think that. I don't know if you are a Realtor® or not. I can see where a real estate sales person might have listed the house, watched either no nibbles, or perhaps a few "you must be kidding" buyers. Then commiserates with the buyer with a "I guess you stay here, walk and do the FC shuffle, or try to get a short sale out of the lender". Of the three, the only one that might yield any commission would be the last one. So the sales weenie is trying to hang on, while the owner is trying to maneuver into some position that extracts themselves from where they really don't want to be. The only other alternative is jingle mail (which is nearly an FC, and only works in some states).
If you see any other viable exits, please share them with us.
Sniglet, i dont care. if i have a payment i am comfortable with, have acceptable dti, financial reserves, am in area with good paying jobs and good infrastructure than i would be a fool to mail the keys. i dont care how much the house would loose on price, but well i am just one of the conservative europeans
but really, i doubt highly that people in 30 fixed mortgages will go deliquent, those in arms not knowing/not realizing their payments will go up, these kind of people will go deliquent, i mean since its not what they thought they signed on ...
"If the buyer isn't a rube, just a normal buyer making a realistic offer, then what's the big yank here? How long does a "normal" RE transaction take?"
Just thought I'd come out of lurking status with a current personal experience of a short sale to add to the discussion. I should preface this by saying I'm a (wannabe) first-time homebuyer in SoCal. I don't consider myself a rube, but I'm by no means an expert on housing and homebuying (let alone the lofty realms of finance and economics). Reading this blog and the comments over the last couple of months has been very educational.
Anyway, my fiancee and I bid on a short sale house back in early Oct. The sellers had defaulted and vacated several months earlier as the house sat unsold. It was also scheduled to be auctioned but our bid postponed it. Our bid was 25% below what they had bought if for in 2005. There are 2 lenders that have to approve the deal and after 3 months we're still not there. From what I understand it was a case of the holder of the second loan (who stood to lose out on everything) holding out for the primary lender to throw them a bone. Of course as this whole process has dragged out, the market has continued to tank and what seemed like a such a good deal 3 months ago doesn't seem quite as good. Three months ago nothing for sale in this neighborhood had shown that dramatic a drop. That's changing. We looked at another house that was purchased in Sept(!) for $650k and is listed as a short sale for $465k.
Anyway, the point of all this was that even though it would seem this should be in everyone's interest to get done it isn't. And as the weeks went by the comps kept dropping. So now I'm thinking we should drop the whole thing and wait. Since I discovered CR my trepidation about buying anything has increased.
By the way, I have to say this is one case where the comments are almost as good as the blog itself. Sure there's some chaff to wade through, but it almost never degenerates into tedious sniping like most comment forums. Thanks for that
I recall that ,after the S&L crisis, properties bought from the RTC at pennies on the dollar were ,in many cases, bought by vulture funds structured by the very executives of the S&Ls that made the bad loans in the first place. They profited both coming and going.
If I remember this, I assume the industry also has long memories and will be watching for similar fraud. A cynic might argue that the long term goal of the underwriters was to buy the properties at FC or REO sales down the road.
Jim
Here's a short sale horror story I heard at a Christmas party. The seller is at the end of their rope in pre-foreclosure, the Realtor lists the home for $257k and finds a buyer at $253k; as part of the short sale process, Countrywide orders an appraisal that comes back at $270k.
On that basis, Countrywide refuses the short sale, and will soon own the property via foreclosure -- they will probably sell it for $220k, with a net $50k loss over the short sale they turned down. Or rather, BoA will be out the $50k, and stuck with disposing the REO.
Almost a year ago I predicated rent would go down.
Today I looked at craigslist in two Ca. counties and found several homes which rented at below market price (about $2K in area where similar rent is $3K) with this note:
"Home is on the market for a sale price of [around $900K] - rent is 3 month and after it is month to month this is why rent is so low"
So these guys think they will sell a $900K home in the spring and willing to make $6K until that time and $2K later.
I am guessing mortgage+taxes on such property is at least double the rent if not more......
Don't know if anyone's mentioned this before, but there's this CW employee's blog out there that offers a fascinating glimpse inside the company.
http://excwinsider.com
"They'll end up in insurance, in mutual funds, in retirement planning, and commodities."
Somebody beat me to this last time, but lemme try now:
"Soylent Green is Realtors®!"
Yeah, ck, but after all these years of buyers jumping all over your case because your appraisal didn't come in high enough, isn't it refreshing to have them all over your case because you didn't come in low enough?
I did a post early in the year about some news story in the "early days" of the credit crunch. The "victim" was this doctor who was all pissed off because the appraisal on this big house he wanted to buy came in too low. We had a highly entertaining discussion in the comments about why a lender should care about appraisals vs. negotiated contract prices.
That seems like about 100 years ago.
mojeaux --
As a SoCal homebuyer, I'd be waiting for some signs that values have stabilized, or at least stopped falling precipitously. Those 20% per year increases have turned into cliff diving declines, with no end in sight.
You might check out the threads at AppraisersForum.com, and maybe even hook up with a SoCal appraiser -- for some pre purchase value trend consulting.
Appraisers Forum - Real Estate Appraisal Forums
Allowing people to walk without consequence (and in an expedited fashion, no less) would be about as dumb as allowing them to have borrowed beyond their means in the first place. The message to send (and the one that should be circulated when the homeowner tells his/her relatives, friends, neighbors and co-workers about the experience) is -not- that realizing on the free put is easy, quick and painless.
Absolutely, put any prospective short-seller through a thorough evaluation with respect to -all- circumstances applicable to the loan and the property. And if realtors et. al. cry about how long it takes, too bad. Salespeople -always- whine that it takes too long to consummate a transaction. They aren't concerned with risk analysis at all; they simply want to close and move on to the next deal.
Although I recognize that it must befuddle many who became accustomed to the greased wheels emblematic of the easy money era, the reality is that proper due diligence is a good thing...for this generation and the next.
Tanta --
Actually, they still want an inflated appraisal -- so they can refi the $189k first and second into a $200k FHA, with an appraised value of $207k. Since the home is worth $170-180k at most, and REOs selling for as low as $125k, I can't help them -- other than referring them to HopeNow, or the long process Mod Squad of their ARM note holder.
These are people that want to stay in their home, and are willing to remain upside down to do so -- but they can't hang on with their reset ARM dragging them down. They are perfect candidates for a start rate reset, but that will require some foresight on the part of the lender.
dissident,
victim profile too funny!!!
In particular the blame bit... it's lenders' fault and politicians 'fault... people who bought houses and got HELOCs they couldn't afford, what the heck.. they're all POOOOR VICTIMS
.a bit like the guy on the marathonic post the other day who wanted a short sale just because now he's underwater and what the heck someone else is gonna pay.
I guess since the lenders were willing to just take the borrowers word for it that they could like totally afford the house in the first place, it is coming as a bit of a shock to the borrowers and their realtors that the lender won't just take their word for it that they like totally can't afford the house anymore.
--
Go Chargers! Kick them paty butts next week.
Jas
You could probably get expedited transfer to the Loss Mit people. After all, the collections folks have some notes about you in their database!
They prolly exchange Christmas cards... invites to family gatherings, etc.
They prolly exchange Christmas cards... invites to family gatherings, etc.
I suspect they sit around in the break room saying things like "I'll let you have the last piece of pizza if you call AllenM this month. I had to call him last month."
mojeaux --
I'd consider pulling the offer and resubmitting lower. Buying a house is a very personal thing, but not paying more than you have to is simply prudent. Just remember, on any negotiation, when you're the one putting up the money, you're the one who can say no and be no worse off than before.
I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents
2&20...nuf said
Rich's plea 01.13.08 - 1:06 pm to consider the neighborhood deterioration and jcsc's | 01.13.08 - 2:56 pm reply that he has
a much larger vested interest in ensuring the health of free markets
was thoroughly drowned out by anony's crickets, you know?
Ethical considerations tied up in that "just walk away" (could be characterized by "just stay put and take a beating"), so unprofitable to take seriously.
Yow know it.
But Allen C is tryin his best to provide a working example...sometimes the black sheep are the best.
transient said: "If my house drops 30% in value (from today's value) then I will be underwater on my home loan. However, I'll continue to pay my mortgage"
Well, you would be exceedingly silly and making a terrible financial decision to continue making payments if your home was under-water.
first, that was me, not transient.
second, did you read my post? I clearly wrote that comparable rent for my home is MORE EXPENSIVE than my mortgage payment.
I would GUESS that even with 30% drop in RE values that my mortgage payment would STILL be less than comparable rent.
Remember, not everywhere is California where you pay 2x the amount to buy a house than you do to rent. My current mortgage is about 60% of what it would cost to rent it... even less after tax deduction.
Sniglet, I don't doubt that LOTS of people will walk when upside down. They did it in California and Texas in the past. However, that is different than saying they ALL will walk.
Our point here is that it is the job of the Loss Mit Dept to figure out who is who...
and no, it's not so simple as saying "100% of people who are underwater will walk" because this clearly isn't true.
I've already given you one example (me) who wouldn't walk.
Wells Fargo would lose a lot of money if they let me short sell... because I have the assets... and because I would like to maintain my credit for future vulture buying
I know this is unrelated, but did you all notice that Ben Stein is advocating the nationlization of big banks (a little exageration...) at the end of his column today...
This is how a moral hazard dilemma should be described, in the first person. The big problem with trying to nationalize moral hazards is that we don't all share the same morals.
Some people might think that it's a greater moral hazard to let neighborhoods grow up in weeds than to reward people who find themselves trapped in bad loans.
There's moral hazard in letting abortions take place and also in trying to stop them with govt. action, depending on your morals. So always think of moral hazard in the first person (your own morals), not your neighbor's or your nation's.
There is one bit of difference re front vs back side due diligence. If properly done on the front side, ability to pay should have been established by w2s bank accounts, etc. If the lender actually cared, and the owner really wanted the house and planned to keep paying for it, there is an alignment of interest that would bring the actual documents into view. On the backside, however, there seems to be a reward to the "homeowner" of hiding such information, especially assets. To what extent do lenders make the effort to uncover the borrowers financial condition and what if the borrower really wants to hide their ability to keep paying?
Somebody please correct me if Im wrong, but the most toxic, most devastating loans for the housing industry will turn out to be the Option Arms (where people have the option of paying the minimum). The vast majority of those Option Arms do not reset the last six months of 2011 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!
You think 2009 will be bad? What happens in 2011 when all those folks who have been paying the minimum look up and their negative amortization has tacked on 30 percent or more onto the price of their home, while the housing market is in the toilet?
I cant confirm this, but I believe that there are far more billions in Option Arms than there are in Subprime loans.
with rents coming down...an option ARM holder is only going to be motivated to hold on if their costs are about the same as rent. Many Option ARMs were used by investors. When Capitulation hits, every investor will walk. As Warren Buffet likes to quote, you only know whos been swimming naked when the tide goes out
Really great post! Very insightful!
To what extent do lenders make the effort to uncover the borrowers financial condition and what if the borrower really wants to hide their ability to keep paying?
At this point it's not really about lenders making efforts. It's about lenders refusing to tranfer the Realtor to the Loss Mit group until the borrowers cough up docs. I mean, here we are talking about who has leverage and who doesn't.
If the borrower is not willing to verify assets? Or if you do a quick title search or order a credit report and see evidence of asset-hiding going on? You send out the NOD. If the borrower doesn't want a foreclosure, the borrower will declare BK. And then you can see if a BK judge puts up with this shit about how tough it is to find bank statements.
Verifying income and assets is like baking bread. 95% of the time spent is waiting, not working.
One of the reasons that credit quality slipped is that the originators/servicers, and owners are no longer the same people. If you had a local bank that originated the loan and kept it on their books, you would have a knowledgeable, motivated party to negotiate with.
I think it is reasonable to try to create a process that would allow a properly documented short sale proposal to be evaluated on roughly the same basis. It sounds like the agents are saying that this isn't the case, and I'm not surprised.
When the traditional mortgage practice was deconstructed it introduced problems due to the differing incentives of the various parties to the process.
I may be the last person in America who has a mortgage with a local bank. I have been able to walk in during lunch and get a loan modification instead of doing a refi to lower my interest rate. They charge $450 or something in that neighborhood to do the mod.
Of course it would be an entirely different conversation if I wanted to do a short sale, but at least I know who owns the loan and where they are located.
It seems reasonable that a troubled borrower should be able to at least pitch a solution to a problem, and it sounds like some banks or servicers do it and others are so bureaucratic and overwhelmed that they can't. If that's what they want, then I'm fine with it.
Sniglet said: The vast majority of people who own homes worth less than the mortgage will default, regardless of whether they have the financial wherewithall to keep current on payments.
This is a false premise, Sniglet, and false premises lead to false conclusions. There is enormous literature on this: most legitimate borrowers will stick with an underwater mortgage if they can pay. They default when they are underwater and they then get a shock -- job loss, hospitalization, divorce. Economists think their warmbloodedness is very strange, but it results in lower interest rates on mortgages. Look up "ruthless default" on scholar.google.com
Mark
albrt said: "Your assertions about how "everyone" will act appear to be simple psychological projections from your own troubled self."
I admit that there are SOME people who would still continue to make payments even if their home was under-water, but I strongly suspect it is a minority. I suppose that a lot of my thinking is founded on the belief that there will be huge drops in property valuations. People who just a little under-water might not walk away, but the greater the property value decreases the greater the odds that someone will call uncle and throw in the towel. At some point property prices could drop so much that an investor could buy equivalent homes and rent them out for 50% of the payment long term home-owners are paying.
Also, the more prevalent defaults and foreclosures become the less of a stigma there will be around defaulting, and the less concern people will have of being pursued by lenders. In short, if we have a deep real-estate bust (with average home prices dropping 30% to 40% across the US), then I think we will see a far higher percentage of home-owners deciding to walk away than traditional studies and statistics indicate.
Yal, bubble bloggers and people on here have been warning about the coming pay option ARM/ALT-A reset storm for some time. It seems to have taken a backseat at the moment with all the talk of subprime.
The Pay Option/ALT-A/Prime/Agency ARM reset storm actually starts December of 2009 and continues to the end of 2012.
Subprime resets will continue though 2008 and then taper off. I predict 2009 will be a "dead cat bounce" for the housing because foreclosures and inventories may decrease slightly because all the subprime ARM have stopped. The REIC will be screaming "we've hit bottom" with fury.
Then in 2010 it all goes to hell. Most of the Pay Option/ALT-A stuff was used to purchase homes on the high end of the housing market. With prices sliding, refinincing will certainly be impossible at this point. The low to upper middle class is going to be hit hard.
Moral hazards doesn't apply to (a) incorporated entities (b) individual people whose salary is greater than $1 million/year. The decisions of these types of parties are purely economic and flinty; they are never tempted to take unwise/ill-considered/illegal/immoral actions to get more money. Never.
Didn't you know that?
Cranky
There's a typo in my reset range, the Pay Option/Prime/ALT-A storm goes to the end of 2011, not 2012.
Sniglet, you're simply wrong here. Like Mark said, look up research on "ruthless default"; you'll find that it is simply not true that people default as soon as they're underwater. This paper cites earlier work that suggests only 5% of borrowers who are 10% underwater will default.
One of the key things to remember is that, for most people, defaulting isn't free. It's expensive to move, to find a new home, to re-outfit that home, and the non-monetary costs are also large (disruption of your life, getting used to a new area, the kids adjusting to a new school, maybe needing to find a new job, etc.). So it's not at all a trivial thing for most people to leave their homes.
You're likely to be closer to the truth for speculators, but (a) they're only a fraction of the market, and (b) they still have substantial costs (credit rating hit that basically stops their ability to speculate, potential legal costs, non-money costs associated with bad credit and getting hounded by the lender).
So it's a massive error to assume that anyone who's underwater will default.
that suggests only 5% of borrowers who are 10% underwater will default
Let's put aside Aunt Emmie in flyover country for a moment and talk about where the market and money really is, the super-appreciated areas of high population like California, Boston, Denver, Maryland, Florida, Seattle, Portland, etc.
Here, prices were bid up based on generationally-low interest rates, zero-down liar loans and temporarily affordable pay-option carrying costs. The "innovative" financial products that drove the market up are GONE now, so the market will have to adjust to new realities concerning down-payments, buyer five-Cs, and an adverse interest rate environment on top of all that.
This 5% number you think may apply in static situations, but this is a dynamic slide into the abyss. The abyss itself isn't so horrible -- 2000-2001 pricing levels -- but the FOUR TRILLION of existing lending that this slide is going to take out is where the financial stress is coming from.
to the truth for speculators, but (a) they're only a fraction of the market
25% during the bubble times!
As an aside, did you know that our government's HOPENOW program phone number is 1-888-955-HOSED?
I'm an educator in the real estate and mortgage industries and have taught the basic "short sale" class to Realtors for 8 years now.
The majority of Realtors have no idea what they're doing when they take on a short sale listing.
They should refer it to an agent who specializes in listing short sales, who knows, from experience, that the lender is going to want proof that the borrower is 1) in financial distress (meaning something about their financial situation has changed from the time they got the loan to now); 2) does not have the money to pay back the shortfall, and; 3) is willing to sign an new, unsecured note to pay back the difference.
Anything less than this, and the file get's transferred to the "maybe" pile where it sits for a long time.
It's sad to hear Realtors blame the lenders instead of looking at their own lack of education in this obviously growing area of need.
By the way: Attendance at Realtor short sale classes are on the rise in the Seattle area.
A friend in Virginia is considering going bankrupt. He overbought and then borrowed against the house as it "went up in value". He used the proceeds to invest in his business. The business is also near bankruptcy now.
He's gotta be 300k under water by now, on a house he originally paid 800k for. He cannot make the 6K monthly payments anymore. Heck, thats about twice the rent the house would bring in.
Does one even consider a short sale in this situation, or go straight to bankruptcy?
Southern California Case study:
Sale History
04/30/2003: $201,500
11/10/2005: $350,000
1/12/2008: offered at $219,000
zillow.com
realtor.com
But Dr. Baen of the University of North Texas is optimistic about their futures. "These people are hustlers, hard workers. They're used to getting on the phone," he says. "They'll end up in insurance, in mutual funds, in retirement planning, and commodities."
Raise your hand if you've seen Glengarry Glenn Ross...
04/30/2003: $201,500
11/10/2005: $350,000
1/12/2008: offered at $219,000
2% annualized return? Sounds like a typical flat market. Oh, I'm sorry, you were expecting the 30% return from the first two years to go on indefinitely, weren't you....so you paid $350 in '05 expecting to sell it for $1M in '09. D'oh! Here's your sign.
04/30/2003: $201,500
11/10/2005: $350,000
1/12/2008: offered at $219,000
This is a house down the street.
It was sold new in 03, owner
occupied until it was rented
out Sept. 04 to Oct. 05, then
sold. Looks like the last owners
walked away two months ago.
Tarbel is broker and has priced
a number of homes in the area
at the same $219K.
Raise your hand if you've seen Glengarry Glenn Ross...
Dr. Wu
I started but watching Jack Lemmon's travails was excruciating - I gave up about 30 or so minutes into the movie - too sad for me.
Now, the Sarah Connor Chronicles tonight ? I'll check THAT out.
-K
Re: mojeaux's purchase-
Drop the offer 10K and resubmit; offer the second 3K as a separate transaction to go away?
I'm guessing there's some legal lines in the short sale contract that forbid this, but there are also work arounds? Maybe paying the holder of the second for "consulting work"?
Tanta wrote:
You can't know. That was my point about playing chicken. It's not for people who want guaranteed outcomes.
People who want guaranteed outcomes wouldn't have bought (speculated) the house with an option ARM in the first place.
Also how is the downside small chance of getting hit with a deficiency judgment worse than the other downside where you are going to have to pay for sure? It's a calculated risk.
Just me, but IMO there should be pain associated with FCs and/or short sales.
p.s. People who lied about their income on mortgage applications probably don't have too many qualms about gaming the system when things fall apart either.
"The reality, however, is that it is almost certain that the borrower will default if their home is deeply under-water, even if their finances are ok."
Tanta: And the more you offer people a free put, the worse it gets.
It's never a 'free' put. A non-recourse loan backed by a named asset is a non-recourse loan backed by that asset.
Not anything else.
If the bank failed to charge sufficiently for the quite well known-to-everybody put, that is the bank's fault.
I walked away once. It came down to the refinancing. Could not make it work. It was not the case of being under water. Would have stayed if it was not going to cost a lot more money
Tanta, It seems that you used to work for one of the few professional & above board servicers. Sadly, in the past few years, servicing departments have degenerated along with loan quality at many institutions. Many "Loss Mitigation" departments consist of $7/hr. collectors. And even the RE agents, who are not generally the brightest of light bulbs, can understand that they are dealing with servicers whose personnel can't even screw in a light bulb.
A few months ago, I tried to arrange a short sale for a client who was way behind. The bank wanted the Seller to sign a paper that she would still be liable for a deficiency judgment, wanted to them to fill out all kinds of financial forms (as a prelude to asking for a deficiency?), and then we all realized she would (at that time, not now) have to pay federal taxes on the short. (Meanwhile nobody is actually asking for deficiency judgts so why put that in?) She said no. The bank will lose money on that one. I had filed a Motion to Dismiss to stretch things out during the negotiation. That was 5 or 6 months ago, and the bank hasn't refiled the Motion for Summary Judgt or set anything for hearing. The bank has probably lost an additional $6000, plus the depreciation during the past months and the property is empty, so who knows what's going on with the inside. Of course, I no longer have an objection to the foreclosure, but I guess the file is on the bottom of a pile somewhere, and who knows how long it will take to reach the top?
I will not try to facilitate any more short sales as it is just a waste of my time and the client's money. Tanta seems to imply that the short buyer is assuming the mtg. that usually doesn't happen. Usually the buyer gets their own mtg and the lender gets the short sale amount in cash.
And then the losses stop.
And it goes without saying that it was medium hard to get to someone with decision making power and a few brain cells to rub together to make the decision.
mojeaux - have you looked at the Irvine Housing Blog? If not, google or follow a link from the CR blogroll. Lots of informed discussion and detailed examples.
I really don't think it's a good idea to buy in Socal now unless you're really desperate to own for some reason. A loss of at least a few percent in 2008 is basically guaranteed (could be much worse) and that's a huge financial incentive to put off the purchase to 2009.
Tanta, but the winner of the lottery to call me gets a nice gold sticker for getting the borrower to once again make a payment before the late charge officially hits.
What a waste of time it was for them to call me. Most of the time I let the computer take it to voicemail. I must have been mean, cause they sold me to ASC.
Now we wait for the bottom to be found here in Phx. Everyone seems to assume that there is a convenient deficiency judgment out there to keep the investors in the game, but in Arizona on properties less than 2.5 acres without fraud there ain't no such animal.
Jingle mail, jingle mail!
LL is going to have so much fun in FL!
Ah well, how long until we have a come and take it attitude to real estate, with folks picking up their property real cheap.
Nobody seems to believe it will be as bad as the late 80s/early 90s here in Phoenix.
i think it will be worse, much worse.
Someday this war's gonna end...
LawyerLiz- "And it goes without saying that it was medium hard to get to someone with decision making power and a few brain cells to rub together to make the decision."
This anecdote, and the many others like it, convince Conjure and me that the financials have yet to adjust to the new reality. They're still in la-la land. Their earnings will truly crater.
Now's a great time to be a bear.
Rich,
From wikipedia:
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.
Aside from the conventions of courtesy. I see no reason servicers are in any sense obliged to take calls from real estate agents in a short sale scenario.
If I'm mistaken, will someone please explain how an importunate real estate agent has legal - or any other - standing in the negotiations between servicer and borrower?
Laughing out loud here...as a real estate broker with decades of experience I refuse to handle short sales...I am too old and too flush. So I advise buyers to forget the idea and sellers (if they are truly short) to simply stop making their mortgage payments and stash the extra cash for whatever time it takes the holder to foreclose so they can pre-pay several months rent to a landlord in lieu of having decent credit. And to prepare for bankruptcy. Amoral, I know, but this is about money after all.
I have seen the movie version with Jack Lemon and the Broadway version about two years ago with Alan Alda. The movie version is better, because Jack Lemon embodies the sadness that is at the play's core.
Glengarry is at bottom about how illusions become ritualized. The illusion of the swamp land being sold ("Glen Ross") becomes ritualized in the salesmen's language (sleezy), ethics (sleezy) and hierarchies of worth.
Glengarry written as a classic (Greek) tragedy. It presaged the illusion of the "ownership society" in U.S. real estate of the last decade and how it became ritualized in so many ways, including Realtors' scummy behaviors.
You have seen this real tragedy unfold. You have written about it here. What's missing is emphathy with those who believed and ritualized it. In the most poignant part of Glengarry, you cry for the sad old conman (Jack Lemon) who experiences a sale that is the high point of his career, a crafy manipulation of an old couple to buy swamp land with their life's savings -- that turns out to be a bad check.
Where is the catharsis here? Where are the tears for the tragedy of Realtors who have ritualized illusion?
Hi Tanta,
Firstly I dont know whats the situation with "black" money is in US but lenders being taken for a ride through falsification of sale prices is old trick - not just related to real estate.
Secondly, great posts and great thought provoking stuff you have put out. I read most of it.
Rahul
rahuldeodhar.blogspot.com
like a broken record another outstanding post and discusion(?) thank you all.
AllenM posted a link to a list of new Countrywide Foreclosures[tm]: "Shows BofA will shortly add 15K porperties under manglement to their own pile of properties, plus the current foreclosure stream."
Yeah, but what's with all this Sacramento stuff? I want my free real-estate to be in Tahoe or Mammoth!
I think more attention needs to be paid to the fact that not only has the asset depreciated, it is gonna continue to depreciate, and maybe depreciate faster and worse that it has previously.
The fellow up the chain who told of trying to buy at a short sale and now is correctly getting cold feet is the tale of a loss not mitigated because of time wasted over stuff that is not so important as it would seem.
I don't have a heck of a lot of sympathy for realtors, but I do have some. Mostly I am indifferent. It seems that the realtors were actually adding some value here, since it is so hard to get rid of a house now, and are getting slapped down for it.
Anyway suppose that there is actually some sort of a con going on here with the bank. If property values drop another 20-30% from where they are now, the con-ees are going to turn into the conned.
In short, depreciation is going to trump moral hazard, which is going to be a less important factor than one would think.
One could even regard the bank as a con artiste in trying to get rid of property to people who it knows full well are going to be knife catchers.
Wait, I didn't really mean that, that would mean that someone at the lender is smart enough to think of that--not.
Tanta, It's not that a short sale neccessaily gets a higher price than foreclosure, it's that the costs of foreclosure inspecting and then selling the REO can reasonably be expected to cost more and take longer than a short sale. In a declining market, time IS money.
Sniglet, Of course the borrowers ability to pay is important, at least on a recourse loan. he default assumption has always been that if the seller owes more than he gets from the sale, he has to bring his checkbook to closing. The threat of judicial foreclosure is probably enough to get them to bring a check to closing, if the result of civil action is a forgone conclusion.
Quartz, it actually isn't surprising that the lenders want more paperwork when GIVING money away than when they do when lending it. And make no mistake, loan forgiveness IS giving away money, just ask the IRS.
Tanta,
You never fail to impress me! Great work!
jim a said: "the default assumption has always been that if the seller owes more than he gets from the sale, he has to bring his checkbook to closing"
I am not sure how much this holds true anymore. I've read a number of articles indicating that few lenders ever bother attempting to get deficiency judgements these days. Pursuing borrowers for deficiency judgements is costly and time consuming, and the lenders find they are rarely able to collect enough to make it worth their while. Worse, all the confusion of the mortgage industry in the last few years has created so many documentation land-mines that it is easy for lenders to get hung up on some technicality.
In short, from what I understand virtually all mortgages are de facto non-recourse these days, whether they state so in the contract text or not.
Right, right, right, sniglet.
Sellers bring checkbooks to closing only when they owe a few hundred to a few thousand extra. I've done probably 50-100 closings where the Seller was underwater, in my last 30 years of practicing law and it has never been more than about 3 grand.
Lawyerliz said : "Sellers bring checkbooks to closing only when they owe a few hundred to a few thousand extra. I've done probably 50-100 closings where the Seller was underwater, in my last 30 years of practicing law and it has never been more than about 3 grand."
So what typically happens when sellers owe $100K or $300K at closing? Are there actual cases where the owners made good on the difference when the deficit was so huge?
Lawyerliz-- I believe you're generalizing from too small a sample. My own sampling is admittedly also small, but includes a brother-in-law who brought $10,000 to the table when he had to sell during the last downturn (DC area), and parents who, in the 70's had to spend a good portion of their retirement savings to get out from under a house in Canada.
I also know a number of people who have spent years underwater. An acquaintance from Texas had to wait eight years before he was able to sell his house without a loss.
Over the course of their 60+ year marriage and two careers my parents have owned more than a dozen family homes all over the US and Canada. On some they made money, on some they lost. This used to be considered normal. That is why you were always advised not to buy unless you planned to stay in the house for at least 10 years. Then the recommendation changed to 5 years-- and then we had a few, "Whee! We're all gonna get rich!" years.
I doubt many who can afford their payments will consider trying to convince the bank that they are insolvent and moving their families into a rental just because they are underwater. On the other hand, if we begin to hear Casey Serin types crowing about how they stuck it to the bank and how we're all suckers for not hiding our assets and doing the same-- who knows?
Among the buyer-bagholders in the bubble were people who should have known better who just couldn't take hearing their dumb-ass cousin's sneers, or seeing their ne'er do well brother suddenly looking like a financial genius.
There's not a whole lot to be salvaged out of this whole sorry situation, but if we can at least begin to get back to thinking that working for a living, living within your means and saving for what you want doesn't make you a chump, we'll have gotten something.
I am an observer, but this comment seems almost inane: Just exactly how often does an arm's length market produce a short sale price that is so much better than a foreclosure auction price?
I don't know of any studies showing this or how they would be conducted, to compare an actual price with a theoretical price.
However, we have all heard stories of neighborhoods and cities devestated by foreclosed, neglected properties. The act of foreclosing on and abandoning a property itself seems to generally increase transaction costs and lower the value of a property.
I remember when Caluclated Risk speculated B of A bought some sort of toxic death spiral CFC Preferred. That was funny. It is great that different people have different areas of expertise, but I am not sure why Calculated Risk makes such an effort to criticize Gretchen Morgenson of the NYT. And, I don't care to know.
I know Mishkin pretty well!!! He's an idiot!!!