Why a short sale often takes so long
REAL ESTATE: It’s better for some banks to ‘delay and pray,’ brokers say
Tom Bayles from the Sarasota Herald Tribune brings us an enlightening article describes the plethora of reasons as to, “Why a short sale often takes so long” to complete. He touches on the obvious ones which include:
• The banks are being flooded by short sale requests • The banks are under staffed • The existence of multiple liens on the house can drag a short sale out
He also touches on a few that are not so obvious:
• Loans are bundled with other loans and sold off as a portfolio that can include hundreds of individual notes. The ultimate decision to approve a short sale is now subjected to yet another layer which is the investor • Mix this in with Private Mortgage Insurance and you have another approval layer to deal with! • Another reason is better expressed through direct quotes from the article, “Some banks are urging federal regulators not to come in and force them to admit all of their problem loans, he said. “Most banks are trying to buy time. It is called the ‘delay and pray strategy,'” Thomas said. “You delay valuating the house at market and pray the value will come back. If you mark it down for short sale and do that deal you have to take a hit to your capital.” • Then there is “extend and pretend” This is where the bank will extend the term, lower the interest rate or grant a forbearance to the home owner. This strategy is designed to extend the inevitable so the bank doesn’t have to show the bad debt on their books. This happens frequently with higher end homes.
So now you know! Short sales can take a LONG time!
Why a short sale often takes so long
REAL ESTATE: It’s better for some banks to ‘delay and pray,’ brokers say
HERALD-TRIBUNE ARCHIVE / 2010
By Tom Bayles
Nothing is more mercurial in today’s Southwest Florida real estate scene than short sales.
No one can fully explain why it remains such a difficult task to complete one short sale — the process by which a lender agrees to accept less than is owed on a home — while another sails through. The only certainty as to why lenders do what they do: their bottom line.
Sometimes short sales bring more cash than foreclosures, and vice-versa. Which one it is depends on a host of factors, not the least of which is whether a lender has an agreement with the Federal Deposit Insurance Corp. for reimbursement of most losses on a bad loan like those sold short.
Multiple liens on a house and fat home-equity lines of credit that must be dealt with first are easy explanations for why a short sale languishes. Another is that lenders — historically only handling a few cases each year — are now overwhelmed with hundreds or more in a month, a logjam that builds upon itself.
Then there are the complexities of the post-boom world: loans that have been bundled with hundreds of others, then securitized and sold to an investor, and scores of Florida banks on the verge of insolvency that do not want to account for losses on a short sale.
Even with those hurdles, there are short sales that can take 90 days or less from offer to consummation.
Simply put, the decision an individual lender or investor group makes — even if that is not to make a decision — is laden with a convoluted mix of what-ifs, if-thens, no-ways and sure things.
“You never really know why,” said Chip Waterman, a Coldwell Banker agent who has specialized in short sales and foreclosures for decades. “You just know that you are not getting a response.”
‘The logjam’
The Southwest Florida real estate community is keenly focused on short sales because distressed properties are the new normal.
Roughly 4,000 Florida Realtors have completed a short sale certification program since the National Association of Realtors launched it in October.
Nearly half of transactions in the region covered by the Sarasota Association of Realtors involve distressed properties. The proportion is about the same in Manatee.
Those high percentages of distressed sales is the single biggest factor holding back any significant gains in home prices, Realtors say. The enormous backlog of distressed properties also will govern any hope of a return to equilibrium in sales.
Mortgage lenders and servicers were caught unequipped to deal with the crush, said Mickey Ross of National Quick Sale, a Jacksonville-based company specializing in short sales.
“The biggest problem is the logjam,” Ross said. “It’s like you’ve got 100,000 people in a football stadium and nobody expected them all to go out the same door at the same time.”
‘Maniacal problem’
In the worst straits are those borrowers, usually through sub-prime loans, who have had their mortgage wrapped into an investment pool like those held by Citigroup and Bank of America, Ross said.
About 25 percent of boom-time mortgages are contained in such securities. Few of those securities have even basic guidelines for short sales, he said.
“They got into some pretty crazy financial gymnastics,” Ross said. “If your loan is in one of those groups it could be very challenging to get a short sale approved.”
The process of bundling notes and selling them to investors as a security was a boom-time staple, said Irv DeGraw, a banking professor at St. Petersburg College. AIG, Citigroup, Lehman Bros. and others backed, or insured, these so-called “credit-default swaps.” When the housing market began tanking in 2006 and foreclosures began piling up, pay-outs to the investors skyrocketed.
Eventually the federal government stepped in with the multibillion-dollar bailout that shook America’s consciousness.
“It was an absolutely maniacal problem,” DeGraw said. “Nobody understood exactly what we were dealing with and then it exploded. Those taking the risk did not understand the amount of risk they were exposed to.”
In a counter-intuitive move, many investment groups preferred a complete collapse of the security rather than agreeing to short sales.
“When the mortgages start to get into trouble an insurance policy kicks in and they are made whole,” DeGraw said. “If they grant a short sale they are not made whole. It’s one of these bizarre nightmare scenarios where people got too sophisticated.”
‘Delay and pray’
Thomas Budzyn, past president of the Mortgage Bankers Association of Southwest Florida, acknowledged the nightmare scenario that banks are facing with these bad loans.
“You are going to see more banks go out of business this year than in the last ten years combined,” Budzyn said, noting that dozens of banks nationwide have failed so far this year.
In the midst of that crisis, it is somewhat understandable that getting a short sale done is often difficult.
“Some of the short sale offers I have seen, for example, are on a loan of $400,000, and the offer comes in at $125,000,” Budzyn said. “Some of the banks would rather wait until a more reasonable offer comes in rather than take that much of a hit upfront.”
Many are loath to approve a short sale because they stand on perilous footing — one in four by the count of Ken Thomas, a Miami-based expert on Florida banking with a doctorate in economics.
“The banks in Florida are having a very difficult time because they make loans on real estate and we are ground zero for the collapse,” Thomas said. “Instead of being hit by a Category 5 hurricane we’ve been hit with a Category 5 mortgage crisis.”
Some banks are urging federal regulators not to come in and force them to admit all of their problem loans, he said.
“Most banks are trying to buy time. It is called the ‘delay and pray strategy,'” Thomas said. “You delay valuating the house at market and pray the value will come back. If you mark it down for short sale and do that deal you have to take a hit to your capital.”
Others employ what Thomas calls the “extend and pretend” strategy to keep regulators from noticing a delinquent mortgage, whether that be lengthening the term, lowering the interest rate or allowing a distressed homeowner to skip a few payments.
“Banks will say there is nothing wrong with that because we have one on the books for a million dollars and the market will come back in a year, so why we should we hurt our shareholders,” Thomas said.
Banks are hoarding assets to avoid the fate that Thomas described, said Matt Augustyniak of Bradenton’s Horizon Realty, Horizon Title and Horizon Financial.
“They have to show as much assets as possible to balance the books,” Augustyniak said. “That is why these banks are dragging their feet on short sales.”
FDIC cash
When Bank A takes over failed Banks B’s assets, usually laden with risky mortgages, the FDIC often agrees to a “loss-share” agreement to minimize the acquiring bank’s risk. The agreements cover anywhere from 80 percent to 95 percent of any losses on the bad loan portfolio.
In some cases, that prods lenders to agree to a short sale, especially if they can make more with the FDIC cash than the banks would if the house fell into foreclosure.
But the opposite can be true as well, with the lender actually making more from a foreclosure if the loan has a private mortgage insurance payout and can be resold at a good price.
The Committee for a Responsible Federal Budget, a Washington, D.C.-based think-tank, reports that the FDIC has taken over 203 failed banks since 2008, many with a loss-share agreement. Total deposits so far this year equaled $18 billion. In 2008, it was $389 billion, and at an estimated cost to the FDIC of $64.4 billion.
Seventy-eight percent of the existing loss-share agreements have no deductible, so the FDIC starts paying banks for their losses immediately.
For single-family mortgages, the loss-share agreement stays in effect for 10 years and covers losses when the loan is modified, foreclosed upon, when a second mortgage is charged off, or when the property is sold short.
“It has helped us sell a considerable amount of assets that we normally would have had to keep,” said FDIC spokesman David Barr. “We audit the loss-share agreements to look that they are modifying the loans in a timely manner and not just opting for foreclosure or short sale. They have to choose the option that makes the most economic sense to the FDIC.”
‘Little incentive’
Despite the efforts of the Obama administration to speed and streamline the short-sale process, experts say banks do whatever will provide the best outcome for their bottom lines.
Charryl Youman, a sales agents with Prudential Florida Realty in Venice, has seen that firsthand.
What the banks are often doing by scuttling a short sale seems — at first — to make no sense, Youman said.
She had a buyer put in three offers over the course of 240 days on a two-bedroom, two-bath home selling short for $82,000. The buyer gave up.
“I never did hear from the bank,” Youman said. “I did, however, hear from the foreclosure listing agent to take off my lockbox because the bank now owned the property. They sold it for $48,000.”
But it turns out the lender may have played the game very well, she said.
The bank received mostly interest payments for three years before the buyer defaulted. It also received the payout from the private mortgage insurer, which was about $50,000, and then the proceeds of the foreclosure sale.
“The bank walked away with $98,000 — and the three years of mortgage payments,” Youman said. “The bank is not really losing much and sometimes can actually make money on these deals — and so they can have little incentive to take a short sale offer.”