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.

Story continues below

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]

Get HuffPost Politics On Facebook and Twitter!

Comments

[SusanStoHelit]

I bought a house recently - some gorgeous short sales out there - and unless you have 6 or 9 months to waste - forget it. My realtor was in the middle of trying to get one - after months of work - the deal fell through, she has no house. During the time the banks wasted on the deal, the houses's value dropped enough that even if they had taken the offer, likely the house would not appraise for enough to let the loan go through anymore.

We simply did not look at short sales. Didn't matter how good a deal - unless you can be sure you will get the house in a reasonable time - no home buyer is going to buy a house.

I don't know why they're even bothering to pretend they'll do a short sale.

[Kaborka]

Hmmmm...no, not everybody loses. We the suckers always lose, no matter what. The banker barons, however, always come out on top, no matter what

[SusanStoHelit]

Banks lose too - the house loses it's value even further with neglect, foreclosure becomes ever more likely, and the last thing they need is another foreclosed house. They need to make short sales work.

[totaldisbelief]

then it's time to FIX those banksters for good.

[tippydog11]

Watch William Black interview with Bill http://www.pbs.org/moyers/journal/04032009/watch.html4032009/watch.html...................."The best way to rob a bank is to own it" cannot believe this is not over the news 24/7

[cordyc]

Let's not forget that short sales and claw downs can be done for commercial loans.

How come it can't be done for homeowners? Most of these loans have been carved up and sold into the MBS (Mortgage back security) tranches, so a single lender no longer owns the whole loan. The mortgage service companies are forbidden by law from making changes. So the homeowners are stuck along with the whole neighborhood.

Real Estate values are going to continue falling until the economy gets back on it feet with a vastly reduced unemployment rate. Until America can get back to work just expect this mess to get worse.

There is no such thing as a "real" jobless recovery. Manipulating the stock market by the Fed started big time in the mid-1990'ies with year 2000 scare tactics. The Fed pumped the money supply to pay for all the technology conversion needed for the century change. It also fueled the over build of the Internet. Hence the bubble. 9/11 also called for a pump. And then the ridiculous low interest rates of the 03 04 period but the real estate bubble into full expansion.

So the Fed pump has continued until it finally fell apart last year. And now they are pumping again!

American needs jobs, without employment we cannot really recover. NO MORE BUBBLES!

[jmpurser]

By denying or delaying a short sale until it goes away the bank keeps the related mortgage on it's books at "book value" instead of having to write it down to the REAL value. Since we just got rid of "mark to market" the banks now appear to be healthier by simply denying their assets are worth far less than the value at what they're being carried.

[ssfahrer]

A house like this should be BULLDOZED once foreclosed. See , for example this article: http://www.cnbc.com/id/30580830 . It's akin to spilling out milk that no one was willing to buy in the 1930s. It worked then; I see no reason why a massive bulldozing following foreclosure shouldn't work now!

[ownersedge]

Yeh, "They" should subsidize us just the way they subsidize the "Family Farmer".

Look where that's got us.

[peacegurl48]

If they would work with homeowners to restructure the bloated ARM adjustments these homes would not be vacant. I've had my home for 17 years and then got my first ARM which increased my mortgage by $750/month...now I face foreclosure because the lender will not work with me in any way.

Many short sales hurt the owners; it would be a horrible choice for me.

[outragedbystupidity]

did you refi for the remaining loan balance or did you take out equity? if it's the latter, which i suspect,
why is anyone responsible for helping you get out of a risky situation you put yourself in? presumably, you now owe more than the house is worth, but you got your money when you refied.

[karen1p]

You know you should be outraged by your own stupidity.

I am a realtor, The ONLY loans being given out for the last FIVE years have been ARMs, Interest Only, etc. What has happened, is the mortgage industry has lured these people into "safe" loans for "safe" investments.

Now we see how this whole industry is just caving in upon themselves.

They advocated for these loans because closing on these loans gave the mortgage officers a lot of money on the back end. They pushed these loans even when my clients wanted a 30 year fixed.

Now, these people cannot refinance because they are upside down on the loans, they are without a job, whatever. I see it everywhere. And the housing industry is not bouncing back like the reports are claiming. There are new rounds of foreclosures coming down the pike. With every job loss, you can bet there is a foreclosure in the future.

[ownersedge]

Isn't your ARM adjustment going to actually be pretty small, for example if its index is the 6-month T-Bill which is now nearly zero interest rate?

Or did you opt for one of those Backward-walking loans that tacked on [part of] your interest due onto your mortgage principal, until you've now slid "under water".

That was a good question, not here answered, what did you do with the refi money?

Or were you just consolidating debt or otherwise reducing monthly cash outlay
... to stave off foreclosure or other calamity at that time? Were you trying to sell at that time?

Home prices here in the San Jose Bay Area - Silicon Valley have only retraced back to about 2004 prices, so I am not underwater yet, and i gladly pay for my cherished home.

Bob

[williamg]

Why don't you just ask the banks? They're going to say: We don't want to make short sales widespread, because every homeowner and their mother are going to ask for short sales. Who wouldn't? If you owe $500,000 on a house worth $400,000, who wouldn't ask for a short sale?

[outragedbystupidity]

a short sale is merely one small level above foreclosure in terms of credit rating impact. however, it does preclude the legal fees. other extra charges and humiliation of foreclosure.

[karen1p]

They won't be able to keep all the people that are going through foreclosure out of the housing market.

Mark my words, the people who are currently going through foreclosure will be able to buy again in two years.

If not, there will continue to be massive vacant houses.

[mady]

I also don't understand why it takes a new buyer to get the short sale price....if the bank will lower the sale price, why won't they renegotiate a lower mortgage with the homeowner.