The Lender is STUPID for Not Accepting My Offer! Aren't They?

By
Real Estate Broker Owner with StepStone Realty, LLC

The following are true CASES from our years of processing short sales:

  • CASE A:  We presented Lender X with an offer of $85,000.  Lender X refused the offer, foreclosed, then listed the property for $60,000 and immediately accepted an offer of $55,000.
  • CASE B:  We provided an offer that thrilled the first lien-holder, but the second lien-holder refused to accept $3,000.  The house foreclosed and the second lien-holder received $0.00
  • CASE C:  We provided an offer of $120,000 with 3% seller concessions.  The lender rejected the offer.  We presented a back-up offer of $110,000 with 1% seller concessions.  The lender accepts the second offer.

What the heck is going on?  Are the lenders stupid?  Aren't they losing all of this money?

Well, yes and no.  Once you understand how the system works, you start to see why these lenders make these "crazy" decisions.

Customer ServiceYou see, most lenders we deal with (particularly those with big names like Wells Fargo or Bank of America), do not own the loan you are attempted to short.  They simply own the servicing contract.  So while the short sale spends months sorting itself out, and you feel like they are losing "thousands" of dollars.  In truth, they are really only losing "hundreds".  They get paid each month for successful collections.

In order to approve a short sale, this servicer, as a part of their contract, must make sure the short sale is approved based upon certain underwriting criteria.

So while it seems "stupid" that the lender would not accept an offer that nets them more, the truth is, an investor has set out underwriting guidelines that the sale must meet, regardless of the "net".

Since you are "negotiating" (and I use that term loosely) with the servicer, not the actual owner of the loan, their leeway in accepting an offer is extremely limited.  This can make the short sale process tedious and frustrating and sometimes it can cause the lender do something "stupid".

So what happened in each of the above cases?

  • CASE A:  This was an FHA loan.  At the time (FHA has since done away with this short sale underwriting guideline), if the BPO valued the property at less than 62% (I may remember that exact percentage incorrectly, but it was something around 62% -- someone correct me, please) than the original loan amount, they would automatically deny the short sale and move to foreclosure.  The fact that they ended up with about $30k less in their pocket at the end of the day did not matter.
  • CASE B:  Despite the fact that Fannie Mae loans would only pay up to $3k to second lien holders at the time, the second lien holder's underwriting would not accept less than 20% of the loan amount ($50,000).
  • CASE C:  The underwriting guidelines specified the maximum allowed seller contributions bo buyer-paid closing costs as 1%.  Even though the second offer was less net for the investor, the servicer was bound to take the lower offer because the higher offer needed 3% seller concessions.

Trying to relay this information to your client isn't easy.  The distinction between "investor" and "servicer" is lost as they just know their mortgage company as "the lender".  Therefore, when they seem to be making "stupid" decisions, they are, in fact, simply following contractual guidelines as they underwrite a short sale.

This probably doesn't help alleviate the frustration we all can feel when dealing with a lender, but hopefully it will make us all just a little bit more patient!

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Re-Bloggged 5 times:

Re-Blogged By Re-Blogged At
  1. Shanna Hall 09/22/2010 11:43 AM
  2. Mindy Sylvester 09/22/2010 11:51 AM
  3. Mike Calhoun 09/22/2010 02:20 PM
  4. Thom Abbott 09/22/2010 07:28 PM
  5. Michelle Gibson 12/26/2010 10:44 PM
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Rainmaker
709,174
Fred Griffin, Your Real Estate Broker for Tallahassee, Florida 850-339-4861
Call Fred 850-339-4861
Frederick Griffin, Licensed Real Estate Broker

I presented an offer on an REO.   The list price was $200K.  In addition to being "trashed",  the place had structural damage.  Buyer offered $100K CASH,  the local portfolio lender replied through their agent verbally, "No Way".   Several months later, they took $70K.

Next up, an REO house that showed in MLS as year 1985, listed for $250K.  Research and discussions with neighbors showed that this was a 1920's house that had been moved onto the site and been renovated.   Aside from the potential lawsuit for misrepresentation, the place was also a wreck.  Same Buyer offered $100K.   "Nope", said the Bank.   Last I saw, the house was still for sale.

Per your blog title, Daniel, "Are Lenders Stupid?"  

You tell me...

September 23, 2010 12:57 AM
Rainer
81,722
Daniel Francis
MORE listings with LESS competition. Ask me How!
StepStone Realty, LLC

Thanks again for all the comments.  Per your comments, the system is definitely stupid, but understanding it a bit more is a good thing :) 

@Debe: Thanks for the kind words!  We work really hard for agents and love it when it pays off with a happy customer.  I hope we are doing business together for years to come!  And Agent Aaron rocks (except when his fantasy football team beats mine).

September 23, 2010 08:34 AM
Rainmaker
349,885
Ricki Eichler
Broker,GRI,ABR,TAHS,ePRO - Your Texas Hill Country
Ricki Eichler Real Estate LLC

Great blog Dan.  I hate to work foreclosures and short sales.  Fortunately, we dont have a lot in our area.  But we are dealing with one right now.  Be glad when it is finished.

October 01, 2010 11:46 PM
Rainmaker
268,885
Kathleen Lordbock
Keller Williams Realty Professionals
Short Sale & Staging Specialist

to get paid not to accept an offer- instead going to foreclosure- sounds like something our government would participate in!

December 25, 2010 11:35 PM
Rainmaker
249,535
Robin Rogers
ABR, CRS - Real Estate Broker & Investment Adviser
Robin Rogers, Silverbridge Realty, San Antonio, Texas

Thanks for a great explanation of the craziness that happens with short sales. I didn't know these things were going on behind the scenes.

Cheers,

Robin

November 14, 2011 10:50 AM
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Rainer
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Daniel Francis

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