Are you losing short sales because lenders are choosing foreclosures over short sales?

Question

I read this post on Short Sale Daily News (http://shortsaledailynews.com/banks-make-more-money-on-foreclosures-than-short-sales/) that banks are choosing foreclosures because they make more money by making a claim on the mortgage insurance vs. going through a short sale.

Have investors here gotten nearly to the end of the short sale process only to have it rejected by their claim that they have an appraisal/bpo much higher than your offer you submitted? Do you suspect they are lying about the supposed appraisal in order to pursue a "strategic foreclosure" which benefits them more than a short sale?

I am interested in your experiences with this. Please comment!

Scott Hubbard · Answer

This would be true if the bank actually held the note.  Since most residential notes are held by investors, usually held in large pools, most "banks" are simply servicing the loan in line with the governance set forth by the servicing agreements.

While the net proceeds in a short sale may net the investor more over a sale at auction or an as an REO,  I have see instances where our offer was declined one week and then sold at auction for 20% less the very next week.

In my opinion, with the shear volume of defaults, I believe mistakes are made and corners are cut.  I have a database showing where our net offers were substancially more than the eventual auction or REO net.

In addition, having worked through hundreds of short sales, I can honestly say there are certain factors that can reduce the odds for success and here are just a few.

1.  BPO/Appraisals being too high.  It is really difficult to refute an appraisal.  However, a BPO can be challenged but it still is likely part of the consideration.  For instance, BPO A comes in at 100K and a second is ordered BPO B comes in at $80K, they may average both and get $90K.

2.  Mortgage Insurance.  Mortgage insurers have been known to require the borrower sign a note before they will agree to sign off on the short sale.  Since the servicer wants the loss payout, the MI has the right to make collection arrangements.  Also, most MI companies refuse to cooperate under HAFA becuase they must agree to not pursue the borrower.  MI comanies are usually exempted from anti-deficiency protections offered by states becuase they are not a mortgage.

3. Strategic defaults. The servicer, as James said, does not have to agree to take a short sale. The overriding qualifier to a short sale is the borrower needs a hardship and that they cannot afford to make the payments. My experience tells that when it is determined that a borrwer can afford the mortgage payment, then the servicer is less likely to take a discount at all (I have dozens of e-mails which support this).

Over the years, I have seen short sales go from the number one investment strategy to second or third.  The reason are due to several factors I believe.

1. Foreclosure costs have been greatly reduced due to heavy competition (more players than ever before) and also due to automation.  When legal costs are reduced, so goes the advantage.

2.  Servicer's make money by servicing these loans good or bad.   Since they sold the note to other investors long ago, they service fees become revenue for these with little risk to the lender.  If servicers agreed to do short sales or sell at auctions, then they would be missing out on asset management revenues.  It is in the servicer's interest to keep the loan under its control.

Do not believe me, then why are the major servicer's creating property managment divisions aimed at managing foreclosed properties as rentals?

I believe these servicer's, with most of them owned and controlled by the banks that originated the loans, now are able to bring in huge fees from defaulted notes.  They are cleaning up the mess they helped to create and are getting paid very well for it.

Bryan Hancock · Answer

This passage, IMO, is the root of the entire financial crisis.  This passage is also the root of why due-on-sale clause issues are ignored and misalignment of incentives are rampant.  With all of these financial products built to sell instead of kept in-house the whole system is BEGGING for corruption.  The scary part is that this has not been corrected post crisis!

James Harkness · Answer

Huh?

Joel Owens · Answer

Mortgage Insurance Companies aren't stupid.

The servicers have to go by the pooling and servicing agreement for that loan.All options have to be documented that were tried before foreclosure and filing an insurance claim.

If protocols were not followed the mortgage insurance can deny the claim.Mortgage Insurance wants to pay out as least as possible and deny as much as possible just like any other type of insurance company.

The servicer can also face a lawsuit from the investor on the loan if the servicer cannot document that they tried less damaging workouts than a foreclosure.

The servicers make more money extending the loan than foreclosing with fees.

I think with the short sale foreclosure guidelines the government released less short sales are happening with certain types of loans.

The government dumps all the liability on the seller and  makes them jump through all of these hoops now.For example it says documents submitted can be seen by other arms of the government and that you are subject to criminal prosecution and heavy fines.

Some sellers instead of doing that will just buy time and let it foreclose.

Maryann L. · Answer

I'm not seeing it.  I do think a loan with PMI causes a whole different sort of trouble, but usually if we don't get the price we want, we can still get a buyer in and get the sale done.

The BPO's are 50/50.  I used to think appaisers were awful to deal with and the price would come in WAY too high, but lately I think they are within $20,000 of our selling price.  For a BPO that is completely off base we fight it, but we're still having pretty good luck with value.

James Harkness · Answer

Personally, I doubt that the banks had this lightbulb go off all of a sudden and realized that they could make more off of a mortgage insurance claim than by selling the property.  The mortgage insurance was always around.  I'm not arguing with you that there may be less short sales going on, but I doubt the reason is because of mortgage insurance.

Shari Peterson · Answer

James - Yes, of course. But the question I am asking is whether or not investors are seeing this trend that banks are choosing foreclosures over short sales MORE than they were, say, in September 2010.

James Harkness · Answer

A bank is in no way obligated to sell a property for less than what is owed on it.  They do it when it makes financial sense.  If they will make more money by taking it to foreclosure, of course they will not do the short sale.  Banks are in the business to make money, just the same as anyone else.

Are you losing short sales because lenders are choosing foreclosures over short sales?

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