Foreclosure in Yardley>Question Details

Paul K. Stout…, Real Estate Pro in Bensalem, PA

Is it better for a bank to foreclose or do a workout with the property owner?

Asked by Paul K. Stout, CDPE, CRS, SRES, Bensalem, PA Thu Aug 19, 2010

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Paul,

I've recently read a few articles that suggest something like 80% (possibly more) of homeowners that go through a loan modification continue to have financial problems and end up in foreclosure anyway.

I'm not sure how valid that actually is but it would explain why a few good friends (underwriter and bank exec) suggest that many banks seem to have no interest in doing a loan modification.

Just wanted to "put that out there' in addition to the other great comments. I kind of lean toward the banks feeling that in many cases, a short sale is the way to go. (not ideal but perhaps the lesser of 2 evils??)

great topic,

Brian Luce
Weidel Realtors - Doylestown
215-348-5600 x 163
0 votes Thank Flag Link Thu Aug 19, 2010
Banks usually have a Four step process they prefer.
1. Modify
2. Short Sale
3. Deed-in Lieu
4. Foreclosure
0 votes Thank Flag Link Wed Sep 22, 2010
Here is what I am noticing and hearing from the banking world: For the banks, workouts are time consuming and most go back into default anyway. So, many banks/servicers/institutions feel it is not a priority. Also, if the loan is insured, foreclosure might just be easier for them rather than servicing a bad note, as they'll still get paid. Since many REO are sold through servicing, they don't even take much of the banks resources to get rid of them. So, while most reps at the bank say they offer workouts, I have only seen one successfully go through.
0 votes Thank Flag Link Thu Aug 19, 2010
It depends on several factors.

Are the debtors really in financial distress or do they have assets?

Is the property the seller's everyday residence or is it an investment property? If the property was an everyday residence then the bank usually writes off the loss and sends a 1099 for the loss of money to the debtor and currently the taxes owed are forgiven. Not the case if the property was a 2nd home or investment property. (Always consult your accountant or tax attorney)

Does the home have large expenses of ownership? Examples are Home Owner Association Dues, Taxes and Assessments............. In foreclosure HOA fees are limited to 12 months dues from the date of foreclosure or 1 percent of the mortgage. In short sales the full amount of past due HOA fees are still owed. (Be careful here this limit is only if the lender forecloses on the property).

How big of a loss will the Banker accept and is the loss similar to other homes in the area?

Is the offer with in the current appraisal in the area? If not ....will the debtor sign a note to the lender? If not ....will the buyer pay more?

If you are a buyer looking to purchase a short sale you control none of the factors except the offer price.

If you are the current owner, then you know your financial situation and control if you can or will take on debt if the bank agrees to the short sale.

The factors above are all reasons why a majority of short sales do not happen.

The main thing to have if you are trying to short sale a property is patience.

Be sure to consult with a local expert who has closed several short sales in the price point of the home you are involved with.

I wish you well!
0 votes Thank Flag Link Thu Aug 19, 2010
Hello Paul,

I wuld say that for the bank, the best thing to do is a workout. In many cases they are getting compensation from the governement thru the Homeowner affordability act to do a work out.
If the client is upside down or cant afford the mortgage the bank is going to get nothing and may, in this environment take 2 to 3 years to get to foreclose. I am currently working on a situation where the bank has lost over a half million dollars in unpaid interest and lost equity by going the foreclosure route. A work out would have benefitted the bank in this case. Remember if the borrowers stops paying, the bank loses the interest, pays for the taxes and insurance and to mnaintain the property, it also loses on equity as property values decline. A workout is more profitable, because
1. they get some interest payments rather than none
2. They get to claim the loss as a tax deduction
3. they get compensated by the government (taxpayer........yes we get shafted again)
4. they do not have to insure or maintain or pay taxes on the property


Alan
0 votes Thank Flag Link Thu Aug 19, 2010
Well, a workout (loan modification) is ideally the best option in theory. I say "in theory" because a low percentage are being completed in relation to the number of overall requests. When they first began, you heard a lot about having the balance decreased and the rate reduced, but that's not what is truly occuring. Very often, a bank will reduce the rate, add in past charges and (in some cases I've seen) reduce the term. If the borrower has an interest-only loan, they will undoubtedly be offered a fixed rate. Thus, the homeowner is offered little or no relief. Many of those for whom loans have been modified, have found themselves in foreclosure anyway. Bank of America just offered a friend of mine such an option on her first and second, but the combined payment was going to be higher than she already had.

The biggest advantage to a lender workout is the legal fees involved in foreclosure. A foreclosure is much more expensive for them, as it is more painful and long-lasting to the borrower. Ideally, a homeowner in such a situation may be better off trying to negotiate a short-sale and hope they don't receive a deficiency judgement...which follows them for a long time. Many banks are not pursuing that, but numerous will. This is particularly true if it's a rental property, the borrower is still collecting the rent (if the lender finds out) and not making payments. The most ideal scenario is where is when they issue a 1099. It's considered income, but the homeowner may be relieved of any taxes owed due to the Mortgage Forgiveness Debt Relief Act: http://www.irs.gov/individuals/article/0,,id=179414,00.html As usual, one should always consult an accountant and/or an attorney when facing such a hardship.
0 votes Thank Flag Link Thu Aug 19, 2010
Short sale all the way the bank does not in cure as much legal expense and holdig time it is a win win for the buyer and seller
0 votes Thank Flag Link Thu Aug 19, 2010
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