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Short Sales: Banks Blocking Way Out Of Foreclosure Crisis
Brett Ellis, a real estate agent in Fort Myers, Fla.,
was thrilled
when he got an offer for a property in Bell Tower Park in May 2008.
"It was a gorgeous property on
the corner lot," Ellis told the
Huffington Post. The owner, who had lost his job, wanted to sell the
apartment for a
loss rather than go into foreclosure, a strategy known
as a short sale.
The offer was for $350,000, and Ellis, who
is a certified distressed
property expert trained in executing such sales, knew it was as good
an offer as he was going
to get in this market. He immediately sent
the paperwork into the bank.
He waited for four months. The bank finally
told him it wouldn't take
anything less than $400,000 -- a price Ellis was sure he could never
get. In September, the
buyer's agent called to say, "You know what, we
gotta move on, we gotta buy something else."
Now the property is
sitting vacant as it slides into foreclosure. Its
former owner's credit is destroyed, and the house is losing value
every
day. "God knows what the condition is today," Ellis said, adding
he'd be surprised if the property is worth more than $290,000
when it
resurfaces on the market. Add in the legal expenses involved in a
foreclosure, and the bank cost itself a hundred
thousand dollars more
that it otherwise would have.
It's a scenario that plays out constantly, everywhere in the
United
States. In a time of collapsing real estate values, where one in five
homes are now under water, a short sale
is increasingly the only
option before foreclosure. It is less damaging to credit scores and
spares the homeowner the
shame of foreclosure.
It is also a better option for banks: According to one analysis, short
sales resulted in loan
losses of only 19 percent, compared with an
average loss of 40 percent on homes sold after foreclosure.
So why aren't
these sales more widely used?
The broad answer is that the American financial system simply can't
handle a collapse
of this magnitude. The fates of the banking and real
estate industries are intertwined. But they don't work together --
and
the result is that they end up working against each other.
Story continues below
The more precise answer
is related to securitization, the method by
which banks bundle together different mortgages and slice them up and
sell
the pieces to various investors. Securitization makes negotiating
a real estate sale that results in a loss nearly impossible.
"The
most significant aspect is that so many of the banks' mortgages
have been securitized, put together and bundled, sold off
to Iceland
or China or some godforsaken place," said Dave Liniger, founder and
chairman of global real estate company
Re/Max, in an interview with
the Huffington Post. "The bank has to go through all of the various
people who are stakeholders
and it becomes a very lengthy process, and
the bank is turning off the realtors by not even getting answers back
to
them, sometimes for months."
Banks have little incentive to untie those bundles. Since mortgages
are listed on the
banks' balance sheets at the value of the original
loan, if they complete a short sale they must record a loss on their
balance
sheets. That would explain why banks drag the process out as
long as possible. In Ellis' case, the property is sitting
vacant a
year after the first offer, allowing the bank to list the original
value on its balance sheet all along.
According
to research firm Campbell Communications, only 23 percent of
short sale transactions are actually completed. "Three out
of four
potential short sale transactions fail, principally because the
mortgage servicer takes too long to respond
to the offer," said Tom
Popik, author of the survey. "When these same properties are later
sold it further depresses
real estate prices."
Congress has had as much success untangling this mess as real estate agents.
"We've been
trying to figure out probably for close to two years now
why so few mortgages are being modified when it seems to make
absolute
business sense for the person holding the mortgage to modify rather
than foreclose or to take a smaller loss
selling it rather than a
bigger loss foreclosing on it," said Rep. Brad Miller (D-N.C.).
Miller points his finger
at securitization. Once the mortgages are
bundled and sliced up into different pieces, known as tranches, the
owners
of the pieces get paid back according to a certain pecking
order. Senior investors get paid back first and if there's a
loss, the
most junior investors won't get anything. It's those investors who are
blocking short sales.
"The people
with the least senior tranches have no reason to agree to
the modification because they take a complete loss and the people
in
the most senior tranches don't lose anything. So they've managed to
structure their mortgages in a way that makes
it almost impossible to
modify or sell short," said Miller.
Miller sponsored legislation to reform the bankruptcy
code to allow
judges to rewrite those contracts, taking away the ability of junior
investors to sue and encouraging
them to negotiate. But the
House-approved measure died in the Senate, 51-45, killed last week by
Republicans and 12
Democrats, leaving it 15 votes short of the 60
needed to overcome a filibuster.
Dave Liniger of Re/Max said the
provision would have changed the
bargaining landscape. Lenders would have had much more of an incentive
to take a loss
on a short sale rather than see a judge unilaterally
change the terms of a mortgage.
"It was a negotiating ploy
more than anything," Liniger said.
"It's disappointing," said Financial Services Committee chairman
Barney Frank
(D-Mass.) of the banks' tendency to foreclose rather than
agree to a sale. "I've heard that and I've been trying to press
the
banks not to do that."
Without bankruptcy reform, the only power the government has is persuasion.
"In
the absence of bankruptcy [legislation], you're talking about
contracts that we cannot abrogate," he told the Huffington
Post.
"That's why bankruptcy was so important."
Is there any chance Congress will return to it?
"Excuse me,
what planet were you on last week? The vote was 45 to 51.
Why would you ask that? Do I think there's a likelihood we could
overturn
45-51? No," said Frank.
"I wish it weren't the case," he added. "Maybe there's some kind of compromise."
Sen.
Dick Durbin (D-Ill.) isn't confident. "The purpose of the debate
last week was to try to create some impetus for the banks
to start
renegotiating these mortgages in a positive way and the industry
fought it," Durbin, who last week concluded
banks "frankly own the
place," told the Huffington Post. "I think many of the banks have not
operated in good faith
when it comes to this mortgage foreclosure
issue."
Homeowners are the big losers of the banks' battle against the
bill.
But real estate agents are now losing real money as commissions fall
through, making them a potential lobbying
counterweight to the banks.
The National Association of Realtors wants the rules changed: "We are
advocating measures
that would help streamline the process when using
FHA, Fannie or Freddie," said NAR spokeswoman Mary Trupo in a
statement
to the Huffington Post. "We are hoping that new process and
regulations are put in place."
Fannie Mae just wrapped
up a pilot program to test a process for
streamlining short sales by partnering with local listing providers in
Arizona
and Florida to pre-approve 400 properties for short sales. The
government-backed mortgage firm is still evaluating feedback
from
brokers, but overall the program was a success, and a new short sale
initiative is in the works for this year.
"Short
sales are one of the tools to avoid foreclosure if all other
workout options are exhausted. It's always in the best interest
of the
homeowner, the community, and the investor to avoid foreclosure," said
Fannie Mae spokeswoman Amy Bonitatibus
in a statement to the
Huffington Post.
Liniger says Re/Max recently trained 5,000 employees in short sales.
Lita
Smith-Mines, a lawyer who specializes in real estate on Long
Island, told the Huffington Post she and her colleagues often
see
short sales turn into foreclosures because the bank won't play
along--even when losses are as small as $25,000 and
the offer is as
high as it will get. And much higher, in this market, than the bank
will get from a foreclosure auction.
The legal costs of foreclosure
alone typically run to $50,000.
"There's no common sense when it comes to lenders.
They have their
paperwork and if you don't slot perfectly in, they just say no," she
said.
"A lot was taken on
the front end [during the housing boom], but
they're not giving anything back on the back end," she said.
Smith-Mines,
though, said she isn't surprised. "If they actually cared
about borrowers, we wouldn't be in this mess in the first place."
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