Foreclosure in San Jose>Question Details

Bay_area_ll, Home Buyer in Oakland, CA

why is Short Sale ok but principal reduction is not ok? From the banks point of view isn't it the same thing?

Asked by Bay_area_ll, Oakland, CA Thu Mar 31, 2011

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Maybe folks are screaming for principal reductions but as Robert indicates won't be fair.

Buyer A pays $100,000 and puts NOTHING down and gets a loan for $100,000.

Buyer B pays the identical house next door for $100,000 but puts down '$50,000 and gets a loan for $50,000.

Both houses are now worth $60,000.

Buyer A is under water.
Buyer B still has some equity.

Who gets their mortgage reduced?
Buyer A?
Buyer B?

Buyer B actually lost lots of his hard earned money. Buyer A lost NOTHING!

Who gets the loan reduction?
0 votes Thank Flag Link Wed Nov 2, 2011
The one who gets the reduced mortgage is the one who is in jeapordy of foreclosure. If they both are then the one with more equity needs less of a reduction.
Flag Sun May 19, 2013
The "net effect" may seem the same, but the bank gets that loan complete off their books with the short sale and that's what they want to do. There is also the "moral hazard" with principle reductions, especially when given to borrowers who are defaulting on their payments. If you give it to one person why shouldn't every home owner in the U.S. get them? Why shouldn't everyone in the U.S dutifully paying their mortgage get a principle reduction? There in lies the moral hazard.
0 votes Thank Flag Link Wed Nov 2, 2011
Bay Area

The answers saying basically that the bank is stupid or corrupt are wrong!

To answer your question let me ask you a question, would you rather have $200,000 cash in your hands or a promise to pay the $200,000 back over 25 years from a borrower who already has not made payments? The answer is obvious. I would take the cash and run, wouldn't you?
0 votes Thank Flag Link Wed Nov 2, 2011
Hello Bay_area_II

All lenders have learned a great moral in the past from their experiences that "Bird one hand is greater than two in the bush". If the home owner is willing to pay all cash for the reduced principal mortgage, all the lenders would be happy to do so as they can save little efforts and money from paying the commission to Realtor. But how many owners are willing to do that? As you know that we(Human Beings) are all wanting animals so given a chance we would like take every opportunity. What is the guarantee that the owner further not ask for the any reduction and pay with out fail his/her mortgages regularly? That is the reason, Banks/Lenders would prefer short sale and get out of the current situation. It is like now or never.

Paul Reddy, ABR®, BPOR, CHS, SFR, SRES®
DRE # 01876403
Visoochi Realty
(408) 230 2009
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0 votes Thank Flag Link Wed Nov 2, 2011
BRAVO - smart consumer... yes that would make sense.... not in the banking world

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
0 votes Thank Flag Link Sat Apr 2, 2011
In order to do a short sale, the homeowner must prove a hardship. Many would not be able to afford the new payment (even with a principal reduction). It's quite possible they purchased more of a home than they could afford when lending standards were loose (no money down, negative ammortizations, etc.) I suppose if a principal reduction could be justified to help a financial hardship, the banks should consider them as another alternative to foreclosure.
0 votes Thank Flag Link Sat Apr 2, 2011
From a bank's point of view?

Why try to assign any sensible, logical, or rational appreciation for anything?
0 votes Thank Flag Link Fri Apr 1, 2011

Over 80% of the loans out there are owned by fannie or freddie. The ones that arent owned have been sold so many times they cant even find the correct investors.

I think a lot of owners dont know if the banks dont have the original note, then i know there have been lawsuits where they cant foreclose.

I do videos everyday on my site how short sales turn into foreclosures, and why? I even sent a tweet to REALTOR magazine to expose this problem.

Now, its a catch 22 no fannie, market tanks, with fannie, taxpayers take on risk, while big banks make money on loan interest. Whos the real winner?
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0 votes Thank Flag Link Thu Mar 31, 2011
The difference is on a short sale the lender receives cash payment of a certain amount and they can close the books on the loan. With a principal reduction as part of a loan modification, the lender only receives a promise from the borrower will make the payments. This borrower has already defaulted once.
If you were lender: would you rather receive $300000 cash now or $300000 mortgage that may or may not be paid back?
I think the answer is obvious take the cash and move on.
Many if not most loan mods do not result in a good long term outcome.
0 votes Thank Flag Link Thu Mar 31, 2011
After reading all the answers I feel like you all think the Banks actually Own the Loans on the Properties. The thing is the Loans were sold, and the Banks just service the Loans they can't make that type of choice.
Private Investors and/or the Government Own the Loans and they have to Profit.
Why do you think you can't get an answer from Banks.
0 votes Thank Flag Link Thu Mar 31, 2011
No in a Short sale you don't keep the property, it is to help you start over without 7 to 10 years damage to your credit.
A reduction is like saying "Oh we will let you cheat us out of $40,000.00 and stay in the house" I don't think so
0 votes Thank Flag Link Thu Mar 31, 2011
I can only speculate. The guarantee from Fannie/Freddie is much like an insurance policy. The investors in that policy have a contract, going against the policy (insurance laws are very strict) could possibly open up a bigger loss because those who are not in a default situation may want "their" insurance to cover their equity loss reduction, and perhaps class action lawsuits for discrimination would go rampant. Only a big guess on my part.
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0 votes Thank Flag Link Thu Mar 31, 2011
You asked an excellent question. I will have to email it to Obama's Administration and law makers to answer.

Until then, may I ask you who is going to eat that bill (I mean the differences)? Let say, I refi cashed out a few years ago when the market was up. Now, I say market is down and you (banks and its investors) to take it. Is that fair?
Second, banks has to write up loss somewhere and short sale is a perfect way for them to do that. They start fresh with new owner on papers.
Third, who has the most gold than they make rules. It has always been like that in the past and will be in the future. Wall Street will make a call who, what and when they want to do that or not.

Have a nice evening.
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0 votes Thank Flag Link Thu Mar 31, 2011
Thats the thing, the banks like to pass the risk on somewhere else, but reap the benefits. Trust me, they are working on eliminating Fannie & Freddie, but right now its impossible because the housing market is on life support. If nobody buys these loans from the lenders, then you ain't seen nothing yet as far as a crash.
0 votes Thank Flag Link Thu Mar 31, 2011
I did not know that . It sounds like the solution is for Fannie Freddy to guarantee principal reduction
in the same way as short sale and foreclosures.

Because it would be the same outcome but less damaging to the housing market.
0 votes Thank Flag Link Thu Mar 31, 2011
Not really, because here's why. Most of these loans are guaranteed by Fannie Mae. So when the banks decide on a short sale or do a foreclosure. They collect the full amount of whatever is owed to them by Fannie Mae, aka the taxpayers. So they don't have an incentive to do a principal reduction...
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0 votes Thank Flag Link Thu Mar 31, 2011
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