Lender declining a short sale

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Submitted by SD Realtor on April 23, 2007 - 3:37pm

Had a listing last year in Pine Valley. Beautiful home at the top of the hill. You can see it from hwy 8 driving past Pine Valley above the green water tank. Custom built home, couple of acres blah blah blah blah. Nice owner wanted to price it to high. I took the listing after advising him my pricing recommendation was about 100k lower then the price he wanted me to list at. Okay then... we worked together a few months, not much activity at all and he did lower the price somewhat but no nibbles. He asked to cancel so he could work with someone else and I obliged. By then he was in trouble with the lender and had NOD status. The new agent who is a nice guy at Keller Williams marketed the home as a short sale. No activity. They moved the price down to a 750-800k range. They did get an offer at 779k before the trustee sale but the lender said NO!! House went to auction and is now REO. The lender sent a different agent to pick up the keys from the seller. I felt bad for the Keller Williams guy because he kind of got screwed by the lender.

No moral of the story here... just citing an event that happened.

Submitted by PerryChase on April 23, 2007 - 4:20pm.

Sounds to me like it should be.

If short sales were readily approved, then everyone would want one. Knowing that Realtors are the weasel types (not the ones on Piggington), and that fraud was rampant and on the increase, sellers and their agents could engineer all kinds of sales to relatives and associates, for profit, at the expense of the lender.

Lender should not approve short sales until homeowners have exhausted financial means such as savings, 401k, etc..

Submitted by Bugs on April 23, 2007 - 7:04pm.

I think the lender is going to lose their ass on this one. If the property was exposed to the market by two agents and after reasonable exposure came up with an offer, what makes a lender think they're going to do any better by:

- spending the money to foreclose

- spending the money to secure the house and maintain it

- spending the money on a new broker, only to have them slap a "FORECLOSURE SALE" tag on it in the MLS.

Time is not on their side, and meanshile they have an unperforming asset on their books.

There's no way the lender's going net more out of this deal by taking it back and they're high if they think otherwise. They should have signed off and moved on. They might have had a chance collecting on the deficiency under a short sale; burying that borrower by another $100k merely guarantees they'll never see a dime out of him.

Submitted by poorgradstudent on April 23, 2007 - 10:19pm.

I think the moral of the story to me is that if the seller had taken your original advice and priced it to sell, he probably would have ended up better off.

Submitted by SD Realtor on April 24, 2007 - 12:08am.

Maybe poorgradstudent. maybe not... I wasn't trying to make that point. The point I was trying to make is that I really do not understand the lenders right now. I definitely agree with Bugs. Bugs the street name is Rocky Pass, in Pine Valley. Should be pretty easy to look up.

SD Realtor

Submitted by temeculaguy on April 24, 2007 - 1:30am.

I have seen REO stuff priced higher than when it was in it's last few weeks as a short and I've seen REO brown lawners in bad shape with no upgrades priced higher than model matches that are in good condition from private sellers. I had been chalking it up to out of town lenders using old appraisals and the amount owed to determine pricing, not the market. But the REO has the canned language about "no warranty, as is" why would anyone pay more for that little luxury. I also notice these overly priced REO's always have a realtor with an out of town area code, I could have priced it better from an internet search of the MLS. The last thing I've noticed is that two of them were priced with a few hundred dollars of the ZESTIMATE. Sometimes I feel like I'm taking crazy pills.

Submitted by Larry J. on April 24, 2007 - 5:57am.

Mistakes are almost a given - sellers ruled by emotion and quite apparently in turmoil (at least financially), loan servicers swamped by a rising tide of delinquencies (peppered with fraud), inadequately trained loss mitigators, out of area servicers (some of which almost seem to thrive on non-performing loans) - all of which is against a backdrop of people looking backward (at values and data) versus looking forward.

Submitted by aztecnology on April 24, 2007 - 7:45am.

I was talking to a vp at title company this past week who's been in the biz a number of years, and the question of lenders not taking short sales came up. He said that in many cases if there is more than 1 lender, 80/20 scenario, a lot of times if the second lien holder does not agree to the short sale then the first lien holder will not play ball also. Of course this happened last year, and a lot has changed in the marketplace since then...

Submitted by PerryChase on April 24, 2007 - 7:56am.

Of course, as Larry J, mentioned, the lenders haven't yet geared up for foreclosures. The problems with houses is that each case is individual, but lenders need to have consistent loss mitigation policies that apply across the board. They also need fraud prevention/audit systems to avoid fraud by employees, sellers, Realtors, etc...

Submitted by Bugs on April 24, 2007 - 8:57am.

There are still some holdouts who think this slowdown is the creation of the media and that better times are but a few short months away. The NAR pays David Leahrah a lot of money for being their advocate; some of it is bound to pay off.

Submitted by AK on April 24, 2007 - 9:29am.

I've read that some servicers prefer foreclosure to short sales because they can make more money through padded "fees" and "expenses" ... sort of like Larry Birkhead's $500K+ legal bills, I guess. Is it possible that certain servicers are the real obstacle to short sales?

Submitted by Bugs on April 24, 2007 - 10:49am.

I guess that is possible. I can't imagine a lender allowing that to go on too long though. It's a competitive business and you don't win by giving money away.

Submitted by gn on April 24, 2007 - 1:13pm.

This thread is great. When I read the first post by SD Realtor, I was puzzled by the lender's action, too.

I learned so much. Thanks.

Submitted by SD Realtor on April 24, 2007 - 1:29pm.

I have given up trying to figure out the lenders... My guess is that if they did start pricing the REO properties to sell immediately then that "could" start impacting comps and appraisals and that could accelerate the downturn... like it should... I don't know... I am just hacking away...

SD Realtor

Submitted by winterpapa1 on April 24, 2007 - 1:30pm.

I currently work in the loss mitigation department at a major servicer and our job function is to review short sale offers on a daily basis. There can be multiple reasons why the lender does not approve a short sale. In this scenario if the borrower submitted the offer less than 30 days before the sale date the lender has already lost as much as it's going to in the foreclosure process (except for 1 more month of holding costs) so the rational there is to just simply foreclose and get it done with. In addition, the lender has to take on the possibility that the buyer may not close even if the short sale is approved(buyer may not be able to find financing or walk from the deal) which would result in more holding costs if we have to take the property back to sale. Regarding the second lien holder issue, it's not that the first mortgage lender does not want to agree to the shortsale, but if the second will not release their lien then there will not be clear title at closing and the seller (the borrower) cannot close on the deal. For the most part lenders are already on top of the game, but with the majority of California loans having 80/20s it easier to wipe out the 2nd lien holder at the foreclosure auction than try and negotiate with them to accept a significant loss on their lien (some of them are over 100k). I've had some lenders like HSBC and Wilshire accept 1k on 70k balances since they do understand that 1k is better than nothing. Some banks are easier to deal with than others.

Submitted by gn on April 24, 2007 - 3:04pm.

winterpapa1,

Thanks for sharing the info. Another question:

In the case where the loan has been securitized into MBS, how does short sale approval work ?

Submitted by SD Realtor on April 24, 2007 - 3:15pm.

winterpapa1 please post more!

Thanks for that information as it does explain alot. Just to clarify, once a trustee sale does happen, all other notes held in lower positions are wiped out correct? So I assume if the property becomes REO then the lender must only pay the property taxes and of course any existing default on property taxes owed.

SD Realtor

Submitted by winterpapa1 on April 24, 2007 - 3:26pm.

no problem gn,
We are a servicer so all of the loans we deal with are already securitized. There are however different levels of delegated authority within each of our assigned portfolios. For example if I have been assigned all of our Alt-A or Subprime loans, there may be more scrutiny placed on the the original HUD1 to see if there was cash taken out or going over the borrowers bank statements to see if there was a true "hardship" or simply negligence. If it were an A paper portfolio we may simply look at their recent payment history to show that the borrower was maintaining the payments and then simply refer to the latest appraisals that dictate the current market values. You have to keep in mind that short sales usually fall under some type of hardship classification for a servicer. Bottom line is that each investor has their own authority thresholds. Some investors like to be more hands on, while some investors let the servicer make the decisions.

Submitted by TemekuT on April 24, 2007 - 3:31pm.

What about the HOA fees in arrears in the event of a default and foreclosure? I assume if a short sale is allowed the lender would have to bring the HOA current, but in case of foreclosure, what happens? Thanks for anything you can post to educate me.

Submitted by gn on April 24, 2007 - 3:54pm.

"If it were an A paper portfolio we may simply look at their recent payment history to show that the borrower was maintaining the payments and then simply refer to the latest appraisals that dictate the current market values."

I am assuming you are talking about "prime loans". Are the lenders treating borrowers of prime loans differently b/c they are less likely to take advantage of the system ?

I recently read some articles about lenders/servicers agreeing to "restructuring" an ARM instead of letting it reset. Is this process similar to short-sale approval ?

Submitted by winterpapa1 on April 24, 2007 - 4:07pm.

any time sdRealtor... you are correct. after the foreclosure sale we are still going to pay out any delnq taxes to avoid the risk of losing our asset to their tax sale. To answer TemekuT's question: delinq HOA fees that were assesed before the foreclosure sale date are no longer the responsibility of the bank once the sale occurs and the lien is wiped out (assuming the property reverts to the beneficiary at the auction). The HOA may or may not go after the borrower specifically for the past due amounts. Any HOA payments going forward are the bank's responsibility. delinq HOA fees during a shortsale are handled like any other lien. They would be paid out before or at the closing table to ensure that title is clear. The decision as to who pays what liens are decided during the negotiation process between the bank, the borrower and the buyer.

Submitted by PerryChase on April 24, 2007 - 4:08pm.

I'm wondering how servicers can restructure a mortgage. There would have to be some kind of addendum to the note signed by both the borrower and lender. You can't just verbally tell the borrower to keep on making the lower payments.

I also wonder how Realtors negotiate short sales. Do they just market the property then when they get an offer present it to the lender almost as a fait-accompli?

For you guys who have had done short sales, what is the process of getting one approved? I'm thinking that if short sales were easy to get approved, then everyone who is underwater would want one.

Submitted by SD Realtor on April 24, 2007 - 4:52pm.

To be honest Perry no I have not listed a short sale yet. Perhaps sdr or Jim has though.

My guess is that the lender pretty much makes the call and instructs the realtor 100%. I have represented buyers for REOs. In that process the lender had a broker that handled the negotiation but the portfolio manager for the lender called the shots. We tried negotiating and they played hardball. We got a good deal but only because they priced the home to sell very aggressively. I do know that the short sale process is more involved and it "appears" to me that the hardest part about it is proving the hardship case to the lender from the sellers standpoint.

That is a speculative statement by me.

SD Realtor

Submitted by waiting hawk on April 24, 2007 - 8:32pm.

What I am wondering is how long these banks hold on to them before they pitch them for investors (not speculators). Will these banks drop them 10-20k each month for 2 years or drop them more till they sell?

Submitted by winterpapa1 on April 25, 2007 - 11:48am.

"I am assuming you are talking about "prime loans". Are the lenders treating borrowers of prime loans differently b/c they are less likely to take advantage of the system ?"

Not necessarily, we just know what flags to look for depending on what type of loan product we are dealing with.

"I recently read some articles about lenders/servicers agreeing to "restructuring" an ARM instead of letting it reset. Is this process similar to short-sale approval ?"

What you're referring to is a modification of the orginal loan or a MOD. We do those as well. Basically we restructure the loan to make it affordable for the borrower. Typically we will structure the loan to have the interest rate stay the same for 2 years until the borrower is back on their feet or if the borrower was severely behind, we will forgive the debt or recap the deliq amount into the loan. Sometimes we may use a combination of all these tools together. When reviewing for a modification we look at our risk position (is the asset already upside down, what is the borrower's capacity and commitment to pay, what are the investor guidlines, etc.) If the value is already upside down, yet the borrower has a history of making payments it may be in the best interest for the bank to modify the loan and maintain positive cash flow.

Submitted by gn on April 25, 2007 - 12:13pm.

winterpapa1,

You mentioned that "each investor has their own authority thresholds". Roughly speaking:

- What percentage of investors give the servicer full autonomy in approving short sales/loan modifications ? i.e. 50% ?
- In the cases where the servicer does not have full autonomy, how complicated is the process of getting approval from the investors ?

Thanks.

Submitted by winterpapa1 on April 25, 2007 - 1:49pm.

gn,
the servicer has full autonomy in the sense that we can decline/accept a MOD or shortssale within the investor's set guidelines. If the MOD or shortsale does not meet the set standards, we would simply decline the deal and take a property to sale. We would not be able to go back to the investor specifically and ask them to change their standards.

Submitted by gn on April 26, 2007 - 9:38am.

winterpapa1,

Since you have seen a large number of short sale/loan modification requests come across your desk, I was wondering:

1. Are most of them for primary residences or investment properties ?
2. How bad do you think this wave of foreclosures will be ?

Submitted by csartain2902 on May 9, 2007 - 11:11pm.

winterpapa1,

i have been dooing short sales for about 5 years here in arizona. and i have an 85% success rate. i have recently come accross 2 separate investors who each have 20 homes that are all upside down. they are all investment properties. i have only processed short sales on primary properties due to the homestead act. and the deficiency laws here in AZ. however these are all investment homes. what can i do to get these short sales pushed through? i really want to help these guys. they just made bad investments and now they are screwed. will a lender even concider an investment short sale without a valid hard ship? get back to me asap! thanx. -chris

Submitted by Bugs on May 10, 2007 - 9:05am.

There's a difference between giving a break to a borrower for their domicile vs. giving an investor a break. They always break out the widows and orphans and the poor when they want to out a human face on the downsides of east credit. That's not so east to do with flippers.

Of course, Donald Trump is a flipper, too, and he doesn't seem to have much trouble getting sympathy from his lenders.

Submitted by satarnag@amirif... on May 26, 2007 - 9:11pm.

I do short sales in Orange, San Diego and Riverside Counties.

"I also wonder how Realtors negotiate short sales. Do they just market the property then when they get an offer present it to the lender almost as a fait-accompli?"

The first thing I do is get an authorization to release information from my client so I can contact the bank. Then I market the property at the price that I would have if it was a regular sale. I present all offers to the seller until the seller accepts an offer. I then submit that offer, along with the short sale package to the lender. Then we negotiate the terms, like late HOA fees, property transfer tax and other stuff on the HUD-1. I have my escrow agent pad the HUD-1 so I have room for negotiation.

"For you guys who have had done short sales, what is the process of getting one approved?"

The key to get your short sale approved is to influence the BPO. I can't stress this enough. You need to find the comps that match your purchase offer and feed those comps to both the lender and the BPO.

"I'm thinking that if short sales were easy to get approved, then everyone who is underwater would want one."

The reason why everyone won't do a short sale is because they usually file bankruptcy, do a deed in lieu of foreclosure, are too depressed to act on anything and just let it go into foreclosure. There are other reasons, but these are the top reasons I come across.

Satar Naghshineh
CA Licensed Broker/President
Amiri Property and Financial Services Corp

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