Why banks preferred to let short sales turn into foreclosures

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I was at REOMAC last week and in one of the panel discussions, a question was raised about why the banks / lenders have so completely failed to be responsive on short sales.  Why is it that the bank will refuse multiple offers at a given price but then accept $50,000 - 100,000 less (or worse) once the property turns into a foreclosure.

The only response came from Rick Sharga of RealtyTrac.  He indicated that it had to do with accounting practices and not common sense.  It is my interpretation that the existing practices had allowed an asset to maintain some "face value" such that the asset still looks valuable on the books and accepting a short sale would diminish the perceived accounting value - at least until the asset was removed from one set of books and was added to some other, where it eventually gets foreclosed upon.  Rick said that going to the "Mark to Market" accounting practice would reduce this problem.  I imagine this is because the asset would always be marked to its true value (give or take) such that there is no incentive to maintain falsely inflated books and deny a short sale.

If anyone can add further clarity to the issue, that would be appreciated.


Robert T. Boyer, Ph.D.
Robert T. Boyer, Ph.D.
San Diego's Finest Real Estate
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Rainmaker
158,285
Tina Gleisner
Home Tips for Women - Portsmouth, NH
Home Tips for Women

like your little follow me on twitter ... so now I have to learn how to do same

Apr 11, 2009 02:04 PM #36
Rainmaker
22,199
Leslie Hampton
Keller Williams Realty Boise - Eagle, ID
Realtor, Boise and Eagle Idaho Homes

Robert, a friend called me the other day to vent about a bank she was dealing with on a short sale. The bank said they would go with an offer she had submitted if she would reduce her commission. She protested, saying that the property was about ready to go to foreclosure and that the bank would lose much more money, and wouldn't they be better to pay her, take the good offer and be finished with the transaction? The bank said no, and that they would just "write the loss off". There you have it!

Apr 11, 2009 02:31 PM #37
Rainmaker
558,671
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Robert -- If banks know how to count, based on GAAP and their own internal business practices, one would think they would be dumping these properties fairly quickly when a decent offer comes in.

That said, one loss mitigator the other day compared an offer price to what Zillow said.

I think the vast majority of banks are completely overwhelmed and just flat out dumb as a bag of rocks when it comes to real estate.

At least they can't get into brokerage these days..

Apr 11, 2009 02:39 PM #38
Rainmaker
514,897
Patricia Aulson
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate - Exeter, NH
Realtor - Portsmouth NH Homes-Hampton NH Homes

Unbelievable isn't it!  

Portsmouth NH Real Estate

Apr 11, 2009 02:42 PM #39
Rainmaker
349,534
Michael Eisenberg
eXp Realty - Bellingham, WA
Bellingham Real Estate Broker

I've often wondered about this, figure those in charge are sitting somewhere in a dark closet waitng for the light

Apr 11, 2009 03:04 PM #40
Rainer
122,502
Julie Martin
Port City Realty - Gulf Shores, AL
Realtor, Broker - Gulf Coast Real Estate

Very interesting.

Apr 11, 2009 03:31 PM #41
Rainmaker
259,493
Pam Graham
All Real Estate Options - Jacksonville, FL
Jacksonville, Clay & St Johns Counties

I'm starting to see banks do a better job handling short sales, maybe I'm just getting lucky....

Apr 11, 2009 04:53 PM #42
Rainer
178,939
Mark MacKenzie
Phoenix, AZ

Robert,

I can't pretend to tell you how banks run their books only that everything they do is for a reason - and that is to maximize the profitability of their balance sheets according to the tax law;see Well Fargo, Wachovia.

 

Apr 11, 2009 05:28 PM #43
Rainer
39,097
Patrick Schutte
Prescott Premier Properties - Prescott, AZ
REALTOR

I've found this to be true in our market as well in Prescott, AZ.

Thanks for sharing!

:) PS

Apr 11, 2009 05:35 PM #44
Rainmaker
260,985
Christianne Gordon
Carson Valley Homes and Land - RE/MAX Realty Affiliates - Gardnerville, NV
REALTOR e-PRO CDPE, SFR Carson Valley Real Estate Specialist

Thanks so much for the insight. In cases where there were two mortgages with two different lenders, I could make sense of it in my head, but in other instances, it just made no sense whatsoever. It's rather sad to know that much of the financial disasters in America are being prolonged because of Accounting Rules...

Apr 11, 2009 06:13 PM #45
Rainer
10,904
Linda Schulte
Keller Williams - Alpharetta, GA

Well, I was excited to have gotten a really good offer on my short sale listing today.  After reading this discussion, I'm not so optimistic.  This is such a convoluted system, isn't it?

Linda Schulte, Keller Williams North Atlanta

Apr 11, 2009 08:22 PM #46
Rainmaker
652,773
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

This sounds like it makes sense -- not the smartest , but makes sense.

Apr 11, 2009 08:57 PM #47
Rainmaker
851,418
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY
Broker-Owner

This is to Dean, comment #17. That negotiator at Wamu was stoned. If they took the $2000 they'd still have a $28,000 loss.

Apr 11, 2009 08:58 PM #48
Rainmaker
536,378
Lynda Eisenmann
Preferred Home Brokers - Brea, CA
Broker-Owner,CRS,CDPE,GRI,SRES, Brea,CA, Orange Co

Hi Robert,

Very interesting, things like this are happening to all of us. Although I'm certainly no expert in this issue, I tend to agree with Jay's comment. That was also my understanding of mark-to-market.

Apr 11, 2009 11:27 PM #49
Ambassador
1,576,010
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 800-610-7253 DRE01267479 - Costa M

I'm afraid Dean's comment of what he learned from the second lien hold may be too accurate. The decisions made just lack common sense unless there's another rationale.

Apr 11, 2009 11:48 PM #50
Anonymous
Anonymous
Marc Brodeur

Once it is foreclosed, they write off 100% of the value, though it still has value. That doesn't make much sense either. They may be trying to time their own quarterly reports and hold off on cutting deals on some to retain better value like you said. 

 

I'm sure it has something to do with generally accepted accounting principles, vs common sense principles.

 

 

Apr 12, 2009 12:20 AM #51
Rainmaker
122,426
Kent Dills
Broker, Dills Real Estate - Bellingham, WA
Real Estate 817-495-8028, Bellingham, Washington

Great post!  Great discussion.  I second the motions that:

1. Banks are under-staffed and unprepared, and

2. Those loss mitigators we are dealing with are ill-trained and inexperienced

3. That those in charge at the banks are "in the dark"

Apr 12, 2009 11:59 AM #52
Rainmaker
313,890
Roberta LaRocca
Simply Vegas Real Estate - Las Vegas, NV
REALTOR®, Broker, Salesperson, Property Management

Robert, there are a number of issues of why the banks pass on short sales, and much depends on the individual mortgage, how it's structured and the local foreclosure laws. Then each lender has their own playbook and is typically overwhelmed, and without a standard to go by, it's nearly impossible to have an idea of how any given loan will be handled. There's more than just the write-downs for tax loss and bailout money. Gabe mentions control of the asset, as the bank may only be a servicer, with the actual note part of a bundled security. Other complications can be a real or assumed 'better' payoff from an insured mortgage, or in the case of a 2nd., the  jr. or other lesser lien holders wiped out in the foreclosure that wouldn't get a cut of the short sale pie.  The banks and Wall St. didn't really understand the paper they were funding to begin with, let alone have a game plan for 'if' the house of cards came tumbling down, which is where they stand now.

Apr 12, 2009 02:49 PM #53
Anonymous
Anonymous
TerryO

Our experience has been those banks which actually carried the loan are more willing to work with a shortsale than those servicing the loan where investors are involved. I have sent examples to several people in our senate and congressional district.

The more of us who contact our legislators with examples of their experience the better our government forces can deal with such. The government unfortunately never addressed the investors..

 

Apr 12, 2009 04:39 PM #54
Rainmaker
156,802
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

I just saw this explanation written by Arthur Delaney and Ryan Grim on Huffington Post 5/8/09.

"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."

May 08, 2009 10:00 PM #55
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