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Richard Michael Abraham

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GOING, GOING, GONE - NO MORE SHORT SALES

Posted under: General Area in Florida, Market Conditions in Florida, Home Buying in Florida, Home Selling in Florida  |  September 14, 2010 8:42 PM  |  4,520 views  |  24 comments
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GOING, GOING, GONE - NO MORE SHORT SALES

Starting now, and until all distressed housing is sold, lenders will choose whenever possible to foreclose rather than entertain short sale offers.

Many agents wonder why lenders are not reacting timely on short sale offers. 

The answer relates to several factors:

1. Many of the distressed mortgages now will be ALT A mortgages, ARMS, FHA, etc. written 5-6 years ago, now resetting where the owner/borrower had less than 20% in equity. (more than an 80% LTV - loan to value)

2. In these instances, these borrowers were required to purchase PMI-Private Mortgage Insurance.

3. Under the provisions of PMI, the insurance is to protect the lender in the event of the borrower's default.

4. A short sale negotiated transaction is a voluntary act of the lender and thus, negates the insurance.

5. Since the lenders want to collect on the insurance, to mitigate their losses, it is to their advantage to avoid engaging in a short sale, and instead, foreclose, and collect the insurance proceeds.

6. Further, in most states, in most mortgage agreements, the borrower is responsible personally for mortgage deficiencies, as part of the promissory note contract. (Thus, the lenders do not need to waive this condition through negotiation that often takes place in a short sale)

The temporary robo-signing foreclosure halt is just temporary, P.R. stunt of lenders to try to gain public goodwill for stock values, etc. Soon banks will foreclose with a vengeance where PMI is involved. 

Example: Home has a Mortgage of $250,000 but now the home is only worth $180,000 in a short sale. But lender can get 90% of $250,000 in insurance or $225,000. Even after paying the $20,000 costs to foreclose, they're still way ahead.

Therefore, if you're a real estate agent, as we proceed into the future, expect lenders to foreclose rather than engage in short sales. My concern is, how will this affect the livelihood of real estate agents?

Warmest Regards,



Richard Michael Abraham

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Comments

By Santarosaguy,  Wed Sep 15 2010, 15:30
Very interesting. Thanks!
By Voices Member,  Wed Sep 15 2010, 15:37
You are welcome Santarosaguy. I noticed many real estate agents were wondering why lenders were reluctant to accept short sale offers and so, I wanted to help resolve the mystery for them. Richie
By Douglas Zeller,  Wed Sep 15 2010, 20:02
Your knowledgeable and professional information like this is a great resource / benefit for everyone!
By Voices Member,  Thu Sep 16 2010, 04:24
Thanks Douglas, I'm trying to give real estate agents and understanding of what to expect and how to plan. Many are relying on short sales that may not exist. Richie
By Emily Lee,  Sat Sep 18 2010, 13:26
Hi Richard, you make an interesting point. I've been fortunate that I've closed some short sales. I think the thing we, Realtors, would really like is just a response from the bank in a timely manner. If they aren't interested the short sale offer, just respond one way or the other. We spend quite a bit of time just waiting for an answer or making multiple calls to try and get a response from the bank.
By Voices Member,  Sat Sep 18 2010, 13:59
Hi Emily, the delays by banks getting back to realtors with offers is not by accident. The banks have hired actuaries, these are the probability math people who do analyses on what generates more bank proceeds. And so, the banks look at a short sale offer and compare what proceeds they will receive from a foreclosure with PMI insurance proceeds. Many realtors wonder why it takes so long for banks to respond. The reason is they're trying to figure out where they net out the most. They may accept a short sale if the borrower does not have PMI but not if the borrower has PMI and they can collect insurance. Richie
By Barbara Grandolfo,  Sat Sep 18 2010, 15:02
Hi Richard,

You know, that makes sense. Three out of the last four REO assignments we've received were short sale listings with offers on the table. We thought it was a little odd that the banks proceeded to foreclose in the midst of negotiations. We kept hearing the same story. Both the buyers and sellers were all left scratching their heads wondering what the heck happened.

Thanks again, Richie!

Barbara Grandolfo
By Voices Member,  Sat Sep 18 2010, 15:31
Exactly Barbara, and now that many or most of the distressed homes will have PMI, most likely the short sale part of the real estate business will come to a halt. Thanks for your comment. Richie
By Rachel LaMar, J.D., SFR,  Sun Sep 19 2010, 19:35
Great, informative points Richie. You present a perspective that many Realtors, including myself, have not considered. So sad that it is all such a game when in most cases the short sale would be more beneficial to all involved.

Rachel LaMar, J.D.
Realtor/Broker
By Voices Member,  Mon Sep 20 2010, 05:52
Hi Rachel, thank you. The mystery is solved. It's so important for Realtors to know the mechanics because they spend so much time working on short sales, etc., only to find that the lender does not respond, and then forecloses on the property. Love your website. Richie
By Kevin Olson & Jessica Laude - Higher Living Team,  Mon Sep 27 2010, 18:04
Outstanding information Richard! Sounds like Realtors (myself included) can expect the rest of the hair on our heads, the ones not yet pulled out, to fall out shortly. I wonder why this didn't happen sooner? It makes complete sense.
By Susanne Taylor,  Mon Sep 27 2010, 18:10
Thank you so much Richard for this insight. Shortsales have become a nightmare, and this information helps explain a lot.
http://www.homesbysusanne.com/
By Voices Member,  Mon Sep 27 2010, 18:30
Kevin, thanks for your comment. The duplicity needed to be explained to agents so they could conserve their time and not waste it on short sales where the borrower has PMI. (Glad to see you played in the big league. As a youngster, I spent a brief moment in the Florida minor league) Devote your time wisely. Richie
By Voices Member,  Mon Sep 27 2010, 18:32
You are welcome Susanne. As I explained to Kevin, the duplicity needed to be explained to agents so they could conserve their time and not waste it on short sales where the borrower has PMI. Thanks for your comment. Richie
By Deborah Madey,  Thu Oct 14 2010, 15:23
If they cannot foreclose due to the "robo-signing" controversy, they may decide to take a different position on short sales.
By Voices Member,  Thu Oct 14 2010, 16:01
Good to hear from you Deborah. By the way, thanks for inviting me to the Mayor's on air session. Yes, if this controversy lasts, could be some change, but my sense is the foreclosures will be back very soon. Thanks for sharing. Richie
By Peterkouros@yahoo.com,  Sat Oct 16 2010, 09:55
And even more money to buy them!

http://rbefa.yolasite.com/
By Voices Member,  Sat Oct 16 2010, 12:34
Correct Peter. A home might only be worth $200,000 but if the mortgage was $250,000 and the lender gets 90% PMI coverage, lender gets $225,000. Thanks for your comment. Richie
By Randy Charboneau,  Sat Oct 16 2010, 12:57
Richard wrote..."1. Many of the distressed mortgages now will be ALT A mortgages, ARMS, FHA, etc. where the owner/borrower had less than 20% in equity. (more than an 80% LTV - loan to value)"

If I may, I'd like to offer a counter view on this...

Saying "MOST" foreclosures going forward have PMI may not be accurate. It is true we had a flood of non-PMI mortgages (non-conforming) go bad initially and these caused the majority of problems. It is also true that for the past 2-3 years there haven't been any of these loans being offered. However, there is a rather large glut of homes coming up that you may be ignoring. 5-7 years ago, the first time home buyers all bought homes using those cute non-PMI non-conforming mortgages. They have been making their payments admirably and are now ready to move up in home (5-7 years is the average for a home owner to live in their first home before moving up). Guess what? They are finding out they are upside down on their mortgages. Many of them owing double or even TRIPLE what the home is worth. There isn't any PMI on most of these homes and there is some equity due to the time frame they have owned. I think the short sale days are still in play and I don't think a statement that the "bank will try to foreclose whenever possible from now on" is completey accurate. It certainly may happen more now than in the past, but I think there are still many exceptions out there.
By Voices Member,  Sat Oct 16 2010, 13:45
Hi Randy, thanks for your comment. I was referring to Alt A mortgages written 5 years ago that are now coming due. (Sorry if I was not clear on that). Of course, I realize no ALT A mortgages have been written for some time. Good point about the first time buyers now way underwater with no PMI. These will need to go short sale, and if what you say is accurate, lots of first time buyers under water with no PMI, then, well, guess there will be more short sales. In my article, I tried to explain the mystery to many agents who felt they had a short sale (sold) only to find that the bank foreclosed. I tried to explain why. In any event, your information makes the housing market look even dimmer. Now, Trulia readers can call you Doctor Doom, instead of me. Thanks for your insights. Richie
By John Walin,  Sat Oct 16 2010, 14:37
Rich
Great points! I have seen both the selling and listing side problems of short sales firsthand and feel sorry for the agents that specialize in short sale properties. REO's are the way to go! Check out my blog comparing short sales to REO's
Side note, sorry for the snippy retort regarding the 25% inflation topic.

John
By Voices Member,  Sat Oct 16 2010, 14:45
John, thanks for your sharing. No need to be sorry. I am just one writer, one thinker. You are also obviously a thinker as well. Richie
By Linda Lorenzo - (214) 578-3131,  Mon Oct 18 2010, 18:59
Very interesting information. I just read John Walin's blog on foreclosures being resumed in 23 states - amazing how fast they can act when money is at stake isn't it? I am, however, fascinated (maybe appalled would be a better word) by the reason (PMI insurance) they aren't doing short sales, again it is all about the money isnt it?
By Voices Member,  Mon Oct 18 2010, 19:36
Linda, it was never about doing good deeds with short sales. The lenders did short sales generally only when there was no PMI to collect. (always about the money) Thanks for your comment. Richie

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