Short Sales: How Everybody Loses From Banks' Opposition

An empty house near Art David's home is stinking up the neighborhood.

The Naples, Fla. house has sat on the market since August 2007, and it's in lousy shape. The water and electricity have been cut off, leading to dead shrubs and thriving mold, and the pool, as David puts it, would be a worthy set-piece for the remake of "The Creature From The Black Lagoon."

"It smells like a rotting pond in the summer time," said David, a real estate agent, in an interview with the Huffington Post.

The home is one of thousands that are languishing on the market and heading toward foreclosure. In many cases, the properties remain unsold because the homeowners were prevented by the banks from completing a short sale -- where the homeowner sells the property for less than the value of its mortgage. Unable to find a buyer to pay the full price, the homes remain vacant until the bank forecloses on the property.

It isn't just the homeowner who gets hurt when a house sits vacant, but rather, the entire surrounding neighborhood is impacted. In fact, a damaged bank-owned property brings down the value of its next-door neighbors by 21 percent, on average, according to a survey of real estate agents by Campbell Communications.

The effects of property damage would be mitigated if banks were more accommodating to short sales, housing experts say.

"One of the best ways to reduce the number of damaged foreclosed properties is for these properties to be sold earlier as short sales," said the survey's author, Tom Popik, in an interview with the Huffington Post. "In many cases that's less of a loss for the mortgage investor and a better situation for the homeowner."

A majority of short sales -- 77 percent -- fail, mostly due to sluggishness on the part of lenders, the survey found. This is despite the fact that losses resulting from short sales average just 19 percent, compared with average losses of 40 percent in foreclosures, according to one study.

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Popik's survey respondents reported average wait times of eight weeks before mortgage servicers provided "yes" or "no" answers on short sale offers. Agents said 37 percent of sales failed because the would-be buyer walked away rather than wait around -- a higher percentage than for any other reason. By contrast, asset managers waited on average just 11 days to respond to offers on foreclosed properties, according to the survey.

The Mortgage Bankers Association told the Huffington Post that mortgage servicers just aren't set up to handle the current volume of short sales. The National Association of Realtors said Tuesday that nearly half of all home sales in the first quarter were short sales or foreclosures. Popik found in his November 2008 survey that such sales accounted for 41 percent, with short sales clocking in at 12 percent of all sales.

"Short sales are one of the loss mitigation options banks use to help borrowers avoid foreclosure. Given the state of the housing market, we are seeing more now than at any time in recent memory," said MBA spokesman John Mechem in a statement. "This obviously taxes servicers who are set up to receive and process mortgage payments, not process, manage and approve home sales. When presented with a short sale offer, the servicer has to do its due diligence, both for its own purposes and on behalf of the investor or the entity that actually holds the note or owns the mortgage on the property. Many short sale offers are absurdly low, as potential buyers think they see an opportunity to get a home far below fair market value. Yet each offer must be evaluated, which clogs the pipeline and slows down the process for everyone."

The owner of the home in Art David's neighborhood tried to do a short sale. One of David's clients offered $402,000 in January 2008. It took the banks holding the first and second mortgages three months to turn it down. Now the property is listed at $345,000.

"It makes no sense whatsoever for the banks not to accept a minor loss by comparison to a significant loss down the road," David said. David reports that there are currently 1,548 short sales available out of 9,735 active listings in the Naples area. David said he thinks the government ought to provide some kind of incentive, such as a short sale credit, for lenders to do short sales. "I can't imagine what's going to happen a year from now when these 1,500 properties -- 1,200 of them go into foreclosure, not to mention the ones not even listed. And that's just one county. What's going to happen across the United States?"

HuffPost readers: Has the bank foreclosed on your home after dragging its feet on a short sale? Have you given up on a short sale after making an offer and waiting months? Email us your story at [e-mail]

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Comments

[Lemeritus]

Tell this to the Democratic senators who voted with the Republicans to defeat the mortgage cramdown; here they are in all their questionable glory:

Baucus (MT)
Bennet (CO)
Byrd (WV)
Carper (DE)
Dorgan (ND)
Johnson (SD)
Landrieu (LA)
Lincoln (AR)
Nelson, Ben (NE)
Pryor (AR)
Specter (PA) (*cough*)
Tester (MT)

This is what happens when people are forced to walk away from their homes -- the damage to the neighborhoods around these abandoned houses is tremendous. And, as Peter007 remarked below, banks stand to lose more than they stand to profit --the costs of foreclosure, maintenance, carrying and selling can actually reduce the value of a property below fair value, even in a short market. The ill-named cramdown would not only have resulted in a 20% decrease in foreclosure, it would have provided strong inducement for banks to work with their customers to prevent bankruptcy as well as foreclosure.

For the MBA to say "Short sales are one of the loss mitigation options banks use to help borrowers avoid foreclosure" is laughable; it is merely another way to squeeze blood from a turnip.

[Hope Lives]

SHORT SELLERS ARE THE VULTURES WHO MANIPULATED STOCK PRICES SO THEY WOULD GO DOWN. NOW THEY WANT TO MOVE ON TO HOUSES AND YOU ARE HELPING THEM. PEASE LEARN FROM A PROFESSIONAL (WHO CANNOT PROFIT FROM LYING TO YOU) WHAT A SHORT SALE DOES TO PRICES. IT CAN RUIN PROPERTY VALUES IN NEIGHBORHOODS THAT HAVE A CHANCE. HOW WOULD YOU LIKE THE HOUSE NEXT TO YOU TO SELL FOR TEN THOUSAND AND THEN HAVE YOUR HOUSE VALUED AT TEN THOUSAND BASED ON RECENT SALES IN YOUR NEIGHBORHOOD. YOU ARE BEING HAD (I WON'T USE THE WORD THAT DESCRIBES WHAT THIS REALLY IS).

[OceanSize]

How can you call a couple who both lost their jobs are are forced to short-sell their home vultures?

I don't think you quite understand the difference between a short seller in the stock market (who is trying to make a profit in down markets) and a homeowner forced into a short sale (merely an attempt to avoid foreclosure).

Short-sale homes do far less damage to surrounding home prices than foreclosure homes do.

[Rogman66]

You obviously have never been involved in real estate on any kind of level. Foreclosures hurt prices far more then short sales do. I have seen time and time again where the bank has refused an offer on a short sale, only to foreclose on the property and have it sell for over 20% less then they could have gotten if they had taken the short sale offer. Not to mention the additional time and money that they lost during the foreclosure process.

I seriously hope you are not actually involved in the real estate industry because you don't have any idea what you're talking about.

[mjegan59]

In Santa Maria, CA, just north of the area where Sideways was filmed, virtually every house on the market is a short sale or foreclosure. We looked for 6 months before finally landing a house that the owner owned outright; we made 5 offers on short sales, all at market rate. In 6 months not one bank ever responded to any offer we made. Countrywide was by far the worst, with lag times of up to 6 months, we and every other person we knew in the market for a house learned not to offer on houses with mortgages held by Countrywide. But Countrywide is not the only one - 5 offers, almost 6 months of waiting and we finally moved on a house the owner owned outright.

Banks act quickly to give a yes or no when a property is in foreclosure. But, by the time properties get to foreclosure, many of them are crumbling, rotting, overgrown, dead or otherwise unworkable. We saw foreclosures where people left with sledgehammers and took every fixture in the house with them, meaning you'd have to put $25 -50K into the house just to move in. In a market absolutely flooded with houses we couldn't find a single house to go into escrow on until we found a little old lady who'd paid her house off entirely and was about to move in with her children.

[bps]

I agree totally. Right now we're involved in a short sale transaction in Naples proper and have a great real estate agent handling the details. We submitted our offer at the end of January, extended a prospective "closing" date three times, and still no word from the mortgage holder. And this was not a "low ball" offer. In fact, the offer is probably 20-25% higher than comparable recent sales for the area. If this property slides into foreclosure, it will most likely sell for half of what we offered. We're patient and we'll wait, but we're already thinking of Plan B.

[Mrtnz]

Attention, Attention...To all those affected by the banks refusing to deal. The real reason they refuse to deal is because they have lost track of the note. Without the mortgage note they have nothing. Call them ask them for a copy of the note. This note is the most important document. without it they have no claim against you. Call them give them 48 business hours to produce said note. Because they bundled many mortgages many banks don't know who has what. Ask for the note, Today!!!
If the bank can't produce the note the property is yours free, they have no claim it's the law!!!

[IamaGApeach]

I'm looking to buy a house in Fl and am looking at a few short sales. My realtor says she rarely sees banks reject an offer on short sales. I've also been told that the bankers don't know real estate and the deals hinder on the lending regulations. If the kinks with short sales were worked out, it would only help the market. Although, it seems that for the seller, their credit is messed up and the bank can at a later time still go after them for the lost money. I'm not sure how that's much better for the seller than a foreclosure.

[ejhickey]

At the present time in the Chicago area, banks and mortgage companies are selling homes at foreclosure sales for between 25% -50% of the amount owed on the mortgage

[mountainweb]

Sadly, I see the obama administration doing nothing to address the insufficient regulation and CLEARLY is doing nothing to help the average American....

[Peter007]

There is no industry more heavily regulated than the banking industry. There are no more regulations that can be imposed.
The problem was that regulators approved the level of risk that banks and financial institutions took. Since the investments had been approved by US government regulators, they were assume to be safe.
If there was no "U.S. stamp of approval" for many of the investments, they couldn't have been sold and as a result, the mortgage market would not have had the cash to fuel the bubble.

[crease]

I see it as banks don`t want to do their homework finding where the mortgage is because it was bundled and sold to someone half way around the world and is now a credit default swap somewhere in the swamps of Jersey....­..........­.

[Peter007]

The problem is that maybe 5 investors hold the paper. Two of the investors will not lose anything, no matter how low the price ( within reason) and two investors have already lost everything.
Its had to get an agreement with that situations.

[Peter007]

Its hard to get an agreement .

[fleaba]

If the bank is going to the trouble of a short sale, why don't they just reduce the cost of the home to the people who are already in it?????? If it goes into foreclosure they are looking at 10s of 1000s to fix up, list, etc. Probably 30K minimum just to get it ready ....new roof, new lawn, new paint, carpet, etc. etc.

[TXfemmom]

Sometimes, the people in those homes have to leave them because of a divorce or a death, or because they have to relocate due to a job. Even with changes, someone may not be able to deal with a payment when going from two incomes to a single income, or when they must move.

Short sales are good in situations such as this but the banks are their own, and the country's, own worst enemies.

[Peter007]

Because the decission is made by 5 different investors. Each has a different position with the mortgage. Some have little risk of loss while others have lost everything and their only hope of getting their money back is a miracle. Their investment is now the value of a lottery ticket. They are not going to throw their lottery ticket away.

[plebeianswillrevolt]

Short sale: Realtor gets big, fat. 7% commission, Short sale: Realtor gets NOTHING...­..........­......

Very much in favor of reform if not abolition of the parasitic Real Estate agent/broker rip off system.

[Peter007]

There is no law that says you need to use a Realtor.
Many people don't.
Its a free choice.

[Mrtnz]

Right lets see you deal with zoning violations, llliegal additions. and banks that don't want to deal only to foreclose.

[OceanSize]

I'm confused. Did you read your post? Which is it? 7% commission or NOTHING?

[Soquili]

There is a key point missing from this article. A homeowner can always "sell short", if the owner is willing to take the loss of the difference between the selling price and the principal on the loan, the bank's permission is not needed. What the author is confusing is "selling short" and the bank "forgiving" the difference between selling price and the principal. The problem is that if the bank forgives the difference, that difference become capital gains for the seller which is then taxed at around 30%. If the bank forgives the seller 100,000 USD, then the seller will owe the US government 30,000 USD. There are very few homeowners who would "sell short" and then pay that kind of capital gains taxes.

[triplbee]

This is untrue. Most people would happily pay taxes on a short sale to avoid the hit to their credit record that comes from a foreclosure, not to mention the emotional pain and embarrassment.

[Soquili]

The question is not "happy" vs. "unhappy" but "able to" vs. "not able to". Why would someone "sell short", mostly likely because they cannot make their payments. If they cannot make the payments on their house, they are not very likely to be able to pay capital gains tax. In the example I used, if they have 30,000 USD sitting around to pay the capital gains tax, they would not have to sell short in the first place.

[TXfemmom]

The only way short sales work is if the bank does not issue a letter for the amount forgiven. This is usually part of the agreement included in short sales. Whereas the bank does not "forgive" the money, they do at the same time, in writing, declare that they will not pursue the debt. For tax purposes, that means that the individual does not have to pay the tax.

[Peter007]

That's a capricious attempt to circumvent a normal law.
A judge would rule against that type of shenanigan.

[Soquili]

You have confused two entirely separate issues. If a bank "forgives" part of a loan, then of course they will agree not to pursue the debt. However that has nothing to do with the IRS collecting capital gains on the forgiven debt. The bank is legally required to report that to the IRS.

[OceanSize]

CAPITAL GAINS TAXES ARE NOT 30%.

[Soquili]

The exact rates and dollar amount are irrelevant, the point is that the combination of "selling short" and "forgiving debt" does not solve any problems.

[Opus007]

We would have been so much better off if the government purchased the non performing loans instead of just handing out money to the banks. The banks take taxpayer money on one hand and seize their property with the other. Prices are never going to stabilize with foreclosures being constantly pumped into the market. The bank execs have not changed their behavior. I guess "socialism" is bad but corporate welfare is just fine.

[Peter007]

When the government "gives" money to banks it is in the form of a loan or stock equity. The government is charging upwards of 5 to 8% on that money so the government is making an investment. Since most banks have profitable operations, the government feels that once the credit crisis is over, the money will be returned.
By buying the bad assets, the government would be bailing out investors that have a loss. We would be paying $10. for something worth only $2.00. That would be a loss for the government.
We did that with a loan to GM. We're not getting that money back. It was a bad investment.

[Teritt]

I heard that banks don't like short sales because although they know the properties are not worth what they are owed, they still show as a fully valued asset until the property is sold. That's why banks showed such remarkable numbers last quarter. If they sell at a loss, it hurts their numbers, or at least what they report. I live in Florida and each county is different when it comes to foreclosure sales. In Duval county, they sell them online almost like ebay. Check out their website:
https://www.duval.realforeclose.com/index.cfm

[TXfemmom]

You are correct. They do the same thing until the property is actually sold when it is in foreclosure. Once again, the banks manipulate everything. Were the accounting rules changed, then the banks would be motivated to get as much as they can on short sales, but do them, and not end up with a bunch of foreclosures which cost an average of $150,000 per home in various ways to the economy.

[Peter007]

They are required to list ALL non-performing assets. Thats the law.
The reason there have been large bank loses during the past year was due to the write downs of non-performing assets. Look at the balance sheets. Its called "reserve for future loses". That number ballooned before the foreclosures appeared.
( D a m n, I hate defending banks. )_

[stylenease]

Long ago and far away, President Andrew Jackson recognized the insidious nature of a Central Bank -- thats why he tried to kill it in it's tracks. But it was allowed to reattache itself to the American people again back in the early 20th century, and just look how they own everything. The banks own Congress and our nation's lawmakers. It's pathetic at what a stranglehold they have over everyone and everything.

[vegasobserver]

The problem is not having a Central Bank, if it is truly independent. The problem is having a megalomaniac President, like Dubya, who manipulates the Central Bank.

[Peter007]

Bush has no control over the Federal Reserve. Its a private institution. ( quasi-private )

[FogBelter]

I think what we are seeing is a Financial Services Industry in Death Spiral. Every aspect of the business has been contaminated. The Short Sale can't go through because the Investor with the least valuable traunch of the mortgage security refuses to accept the risk and take the loss, so they stall out the whole deal, force the distressed homeowner with the available buyer into foreclosure, where owners of all pieces of the mortgage take a loss, and then the foreclosure depresses the proberty values of the neighborhood putting more mortgage holders at risk of being underwater. Death Spiral. And my guess is the investors will get even tighter about short sales as Commercial Mortgage defaults rise and more of their portfolios become toxic. And their Bonds won't help them either being that they have been securitized as well.

Death Spiral.