[UPDATE: It is June 21, I am adding the bank name into this post as the buyer on Property B is going to walk, and this will be the fifth deal to fall apart, which really does support my theory even more. Thank you PHH for doing a bang up job of proving what I speculated, I hope you are having a fabulous Friday, I doubt it.
An additional update, after waiting nearly 90 days the Buyer on Property B is ready to walk, and that means the property will go to foreclosure and an insurer will have to pay. It's time to stand up and prevent this kind of corporate greed and fraud.]
I have been handling short sales in Delaware and Pennsylvania since 2005, before there were even departments within the lending institution – or processes – dedicated to these particular sort of real estate sales. A short sale is essentially when a property is worth less than the current amount owed on the mortgage(s).
To qualify, a Seller will need to list the property for sale at a reasonable market price to avoid a “fire sale” (when an owner puts a property on the market well below the comparable properties in the area), have an accepted agreement of sale or contract to purchase, provide documentation proving that the seller does not have the ability to fund the difference through personal means. Essentially they need to show a distressed financial situation.
Property B
Typically a bank will want the following documents from a seller (seller is referring to a single, or multiple people): two months of bank statements, at least two pay stubs, letter of explanation of situation and circumstances (aka “hardship letter”), Tax filing from prior year, IRS authorization to verify tax filing, comparable prices for area properties, and typically an intake information sheet, or Government form depending on the type of loan.
Once all the documents have been received, which could mean you send them five or more times, you wait to be assigned a negotiator in the loss-mitigation department at the lender/bank/investor. Depending on the type of loan (FHA, VA, Fannie Mae, Freddie Mac, or Jumbo private investor) the response time and response can vary.
Times They are A Changing
There has been a remarkable change in a lot of response times of many banks, and honestly of all the short sales I have personally negotiated or acted as facilitator, I have a 100% approval rating. That might not hold for much longer, but I think I have found an interesting pattern, or a new way the banks are exploiting the short sale process. I will use two specific properties both with the same lender. First I will define the property basics.
Property A: Condo, two story, top floor of a popular Pike Creek area complex that has taken significant hits in the last few years, mortgage amount is $175,000. Market price for the property when I listed it, $85,000 – but it jumped to $90,000 within a week, so I adjusted the price upward. Within three days we had a multiple offer situation and a cash buyer prepared to purchase. The Sellers were extremely organized and cooperative despite being out of state, all documents were with the bank shortly after the property went active, and we were told a decision would come within 30-45 days after final receipt. The approval and PHH (the Lender in this saga)’s ”bottom line” came with 2.5 weeks.
I was impressed. Having had another short sale get blown apart by PHH just 8 months prior, and specifically on Property B.
Property B: Single Family Home, purchased as new construction for $275,000. Additional $25,000 in upgrades including a sprinkler system, vinyl fencing, composite deck, and rough-in for full bath in basement with an egress window. The neighborhood is still building, and the area was hit when the USDA 100% Loan option was pulled out. The property originally went on the market in December of 2011, and the first contract was received in March of 2012. At the time the appropriate value would have been about $240,000 as the area was hit rather hard by the prior years an down turn, as well as those in distress.
The mortgage owed to PHH on the property was approximately $255,000. A short sale facilitator handled this transaction, so I am not sure of all the details, but I do know that in August the bank finally replied, $3,000 above the agreement of sale in place. The buyers were at their max, so they walked away. The bank lost a sale for $3,000. The short approval was valid until mid-December, but the next offer did not arrive until January 2013. Some properties were priced at $225,000 so the values had actually declined since the approval. The property went in and out of contract four times before the final contract was received, one week after Property A was approved.
I was thrilled. PHH was the lender on both Property A and Property B. PHH seemed to have reformed it’s ways and improved their systems and processes. I bragged to the Buyers agent on B that A had gone so well, this would be easy. The contract had a 30 day close, which I still thought was optimistic.
My clients submitted the documents, somewhat sporadically, they were not as well organized and timed as Property A’s prior owners, but all documents were sent to PHH. Rinse, repeat. And after our third denial letter due to incomplete documents (including the listing agreement I had sent it directly to PHH myself three times), I was ready to call foul. And I did. I proposed my theory of mishandling to a friend who passed it along to a friend, and they told a friend, and so on and so on, knowing that it would land at HUD somewhere, and being that this is an FHA mortgage I hoped that might get someone attention. It did. I understand that is is something being investigated now, but that is through a long line of channels, so not exactly first hand at this point, but no reason to question it.
And the Theory Is, Perhaps Reality?
My theory, which I believe is not a theory but really what banks are doing is the following. As with Property A, the loss amount is significant to the bank, so that constitutes a nice write off, therefore it is far more beneficial for the bank to accept the short sale and take the loss as a write off.
After having attended the Pre-Foreclosure mediation hearing for Property B, where I gladly shared my theory and offered to assist those in attendance, as well as called foul on the Bank Attorneys (except for the PHH Attorney, they waited) when they began meeting with the home owners before the mediators arrived, which is against FHA guidelines, I was convinced of my theory. Property B is “close” meaning the loan amount is extremely close to the current market value (which is likely increasing as we approach 90 days of waiting). Why would a bank so quickly approve a short on one property, and not on the second?
Notice, there is no significant loss for the bank to take. So if they deny the short, and push to foreclosure they end up collecting on the mortgage insurance, and then they put the property back on the market as an REO (Real Estate Owned) sale, what is commonly known as a foreclosure.
The concept of buying a foreclosure property at auction is mostly a myth. The bank has a reserve number, and if it is not met, they buy it themselves, then put it back on the market. Then they don’t really care about fair market value as their carrying costs are high, and they already got the insurance money. Essentially they end up “double dipping” by collecting the insurance and then getting the property sold. The bank recoups their losses for the most part, while the homeowner takes the hit.
This gets my attention, and is one of the reasons I strongly encourage my clients to mortgage as much as they can comfortably afford because it is the cheapest way to borrow your own money.
Share the Loss, Not.
The reality is, if you purchased a $1,000,000 property and put $250,000 down, and the value decline to $750,000 you would be the one to lose completely, the bank is not going to say “Well let’s work this out, you share the loss with us, and we will compensate you for a portion of the $250,000″ never gonna happen. The bank is thinking “Gimme, gimme, gimme”. And they get.
Something needs to change. I think that the banks should be required to repay the insurers when they sell the property as an REO, and I also think there should be percentage difference in value/loan that the bank must accept a short sale without any difficulty.
As for Property B, as of today I have been told that some Government folks may have reviewed the file and found problems with the loss-mitigation process after the March 2012 contract, and has been ‘urged’ to accept the short sale to avoid further review. I also met with the bank’s foreclosure attorney at the pre-foreclosure mediation hearing with my client. The banks attorney collected the documents for the fourth time and submitted then internally. That was June 6, and we still have not heard another word.
This merely confirms my theory. I will update you when I have more information on Property B, but I think I am 1,000,000% correct in my theory. Now, how do we stop the banks from taking advantage of a loop hole in the system? Someone/thing needs to fix the loop hole right? But who… What do the insurers think? Who are the insurers? Why aren’t THEY calling foul? Are they fowl?
I guess I know what I might be looking into next… What are your thoughts or theories? Do you agree that enough is enough and it’s time to fight for the right of the consumer and the American’s that might be bankrolling these financial institutions without our knowledge?