I'm seeing a lot of homes getting sold back to mortgage companies and sitting on the market. Don't they deal?

Asked by 5FT8 Real Estate, Massachusetts Fri Mar 14, 2008

Let's say a house is on the market for a long time, and finally gets to the point where it may go to auction. I'm seeing homes go right back to the mortgage company. Don't the mortgage companies make a deal ever? I mean let's say a home has a $400,000 mortgage owed and the mortgage company sends it to auction. If someone offered $225,000 for it, would wouldn't they want to unload it instead of having it sit on the market forever? Let's say the FMV is $350,000.

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Tom McGuirk, Agent, Hampton, NH
Sat Nov 22, 2008
The Foreclosure process is just that a process. The bank may not have the option to "DEAL" pre-auction. One common stubbling block is the presence of a Second-Mortgage. The primary mortgagee cannot satisfy the second mortgage through short sale. The auction process will eliminate the second mortgage and give title to the "Bank" (primary mortgagee) or highest bidder (in most cases the second mortgagee will have to bid in to protect their interest.)

Also it is the duty of the bank to properly notify the mortgagor, advertise the foreclosure adequately and bid in at a certain percentage of market value in order to minimize the deficiency created by the sale. If the Bank offered a "deal" pre-foreclosure, they are opening themselves up to possible litigation by the mortgagor. The forclosure process is designed to limit litigation and also protect the homeowner as well as the interest of the bank.
1 vote
Myke, Home Buyer, 89449
Fri May 23, 2008
Maryann - there's a few things that play into this.

First and foremost - let's say a lender is willing to make a deal on a property. As soon as that property is sold - they have to book it as a loss. Let's say they have 100 properties out there as you described, and they take a 30,000 loss on each one. That's $3,000,000 in losses right out the gate. No way to ever get that money back, no chance to minimize it, offset it - nothing. That's just gone.
That's REALLY bad for lenders.

Now - they decide they do NOT want to take the loss - they hold on to the property even if it sits on the market and turns to crap. That property that they're holding on to is booked as an asset.

Now - this is really important, because banks have to balance thier holdings. They're already taking losses elsewhere, they already do not have the expected cash flow they thought they would have when writing all these loans - if they book losses off of all these short sales - they very well may go completely under. By booking the property as an asset - it's a balance on paper to all those other losses. THey also have the opportunity later on to hopefully try to recover market value for those homes.

You would think they would want to cut thier losses - and get that 225 for the home - but really on paper it's far more worth thier time to have the 350 asset.
1 vote
Carla Bailey, , East Hampstead, NH
Fri May 23, 2008
Hi Maryann. I recently attended a seminar with lenders and mortgage companies who explained this very same situation. It was my understanding that, apparently a mortgage holder cannot sell a property for less than 70% of the value of that property....that may be why it appears that they are not willing to make a deal. Every situation of course is differnet and there might be a mortgage holder out there willing to "eat" the difference themselves between what they can sell it at and what the offer is. ( It was my impression that the 70% is there to sort of help the property owner not have the bank accept an offer for an amount that is unfairly low, leaving the owner to make up that difference and have that amount reported to the IRS as miscellaneous income for them!!) So, in your example of a property worth $350,000 the bank may be able to accept an offer as low as $245,000 ( leaving the bank with a shortage of $155,000 and the owner with $155,000 of miscellaneous income reported to the IRS....) again, this is only my understanding of it and if you would like the name(s) of the people that presented the seminar to ask questions or verify my understanding I would be happy to provide that informaiton to you.
1 vote
Warner King, , Portsmouth, NH
Mon Mar 24, 2008
95% of properties in NH that go to auction are bought by the First lien holder. So many of these are 100% financing with 80/20 loans, the second bank often never shows up...that loan is turned over so many times, they are not on the ball. They become AS IS, typically cost of foreclosure is $60K to the lien holder. Short sales (accepting less than owed) are tough because of the chain of command at the lender authorizing the reduction in price. The property is owned by an entity, not a person...time is of the essence does not apply.
1 vote
Dane Hahn, Agent, Englewood, CO
Fri Mar 14, 2008
Hi Maryann,

Valarie's answer, which follows mine is quite right, the banks do consider the homes they own assets, their name is REO or sometimes OREO--meaning "other real estate owned". Banks consider "short sales" as losses--and because banks hate to report losses, they will hide the asset on their books until an appropriate time and then finally sell or dump the property.

But, Maryann, they're not all banks. Many of these loans were made by mortgage companies and funded by others--third parties--so there are some deals which can be made, (just not as many as late night TV would have us believe.)

In your example, the fair market value is $350,000, and the amount owed is $400,000. You would think the lender would initiate a foreclosure proceeding, and hope that the home would be sold prior to the auction for something in the range of fair market value. Then they might forgive the difference and let the former owner out of his dilemma. But that's not usually what happens. Even if there are bonafide offers, the lenders are not accepting them.

I recently had a home in Brentwood for sale at $220K. It was not worth that much money, but the seller felt she "needed" to ask that much because she owed $190,000 and would have closing costs.in the range of $15,000, and was prepared for an offer in the $205K range. I had estimated the appropriate price to be $149,000 (call that fair market value). She would have none of that price.

The lender took the home from her--by auction--and from me because my client is no longer the owner, and have repriced it at $139K for a quick sale. So there's a deal for somebody. But my wife (also a Realtor) had a house for sale for $200,000, the sellers owed $170,000--but had missed a few payments. The bank scheduled a foreclosure sale, but we found a buyer for $195,000--$25,000 more than they owed, and the bank would not cancel the auction. The sellers called their lawyer who executed a simple bankruptcy and that cancelled the auction, after they closed the sale, everyone was paid off. But it was a shame they had to have a bankruptcy on their credit history. BOTH of these examples were funded by Options One, in my opinion an awful company which I believe is a subsidiary of H&R Block.

So they are all different. Good luck getting a good deal.

Dane Hahn
Web Reference:  http://www.daneandsandra.com
1 vote
Val Cloutier, Agent, Londonderry, NH
Fri Mar 14, 2008
You would think, Maryann, that the banks would be trying to cut their losses, and unload these assets as quickly as possible instead of carrying them. However, the houses are considered "assets, and once they are sold, the bank is taking a loss. As convoluted as that sounds, the bank's bottom line is better when it has the assets. I've seen them deny an offer less than 5% under the asking price, which is completely ridiculous. The average Seller will negotiate more than the banks will, which is unfortunate when you look at the number of bank owned properties available. Factor in that bank-owned property is as-is, with no property disclosures, the majority of bank-owned property is risky, overpriced and just not as good of a deal as it could/should be. If I can help, feel free to drop me a note, and have a great day!
Web Reference:  http://www.SNHhome.com
1 vote
Myke, Home Buyer, 89449
Fri May 23, 2008
also - the way to even have a hope at making a short sale happen - is to make as attractive an offer as possible to the bank. Large down payments, larger cash up front, no FHA Loans, high fico scores - almost the same as you would with a foreclosure. You have to show them that you're serious - that you are capable and willing to commit and close - and that your lender (if you have one) is not going to beat them over the head with restrictions.
Do not ask for costs, do not ask for a long escrow (in fact the faster you can close the better) - make it as easy and simple as possible for the bank to take what money they can from the place.

If they have the confidence that you're capable and willing to close, that there will be no responsibility on thier part other then giving you the property - and they can do it quickly - they're much more likely to consider it, and give it some priority. Otherwise, not worth thier time.
0 votes
Debt Free Da…, , 85260
Fri May 23, 2008
They still want to keep loses to a minimum. It they sit long enough they will lower their prices.
Web Reference:  http://getprequalified.com
0 votes
Myke, Home Buyer, 89449
Fri May 23, 2008
Caryn - what can be even more difficult, and even more common - is when there are multiple notes against a property. 2nd mortgages, home equity lines, etc.
Even the most simple straightforward short sale can take a long time to put through, but once you get more parties involved, the wait grows exponentially.

And still - the lenders have very little incentive to accept a short sale. It really is not in thier best interest to do so. The only people who really get ahead in that situation - is the borrower who was short in the first place.
0 votes
Caryn Becker, Agent, Colorado Springs, CO
Fri May 23, 2008
The big problem I encounter is the delay in response from the bank. By the time the bank does decide to "deal", the buyer has already moved on to another home. The bank is also limited to certain guidelines. For instance, if the loan is backed by HUD, they have very stringent rules. If it is backed by VA, the rules are different. Conventional the rules are different. Unfortunately I am becoming a short sale expert so let me know if I can help.
0 votes
Myke, Home Buyer, 89449
Fri May 23, 2008
also - if you notice what Janos said - "Most of them were sold at or near list price."

That is the bank recovering as much cash as they can for thier assets. :)
0 votes
Mr. Janos, Agent, Pelham, NH
Wed Apr 16, 2008
These are just a few of the foreclosure properties that have been sold in Rockingham County in 2008.
Yes, they are moving!

04/04/2008 126 Hampstead Rd Derry, NH 03038 $100,000
03/07/2008 16 Beach Street Fremont, NH 03044 $110,000
02/04/2008 87 Wheeler Ave Salem, NH 03079 $136,000
02/05/2008 68 Freeman Hall Nottingham, NH 03290 $165,980
02/22/2008 46 Danville Rd Fremont, NH 03044 $160,000
01/25/2008 80 Old Derry Road Londonderry, NH 03053 $194,900
01/31/2008 18 Merrill Ave Kingston, NH 03848 $203,000
02/29/2008 12 Midnight Sun Drive Epping, NH 03042 $205,000
03/31/2008 23 Birchwood Drive Derry, NH 03038 $175,000
02/26/2008 3 Clark St Derry, NH 03038 $190,000
01/17/2008 92 Danville Rd. Fremont, NH 03044 $230,000
02/22/2008 15 Ham Road Raymond, NH 03077 $210,000
02/29/2008 37 Frost Rd Derry, NH 03038 $230,000
02/05/2008 10 Cheney Danville, NH 03819 $230,000
03/21/2008 2 Beaver Rd Derry, NH 03038 $222,500
02/22/2008 1 Valley Rd Newton, NH 03858 $257,000
01/17/2008 107 Nottingham Rd Raymond, NH 03077 $239,900
02/06/2008 70 Main Street Atkinson, NH 03811 $233,900
04/11/2008 53 Mammoth Rd Londonderry, NH 03053 $253,000
01/25/2008 33 Hilton Newmarket, NH 03857 $275,000
03/07/2008 8 Howard Road Hampstead, NH 03841 $260,000
02/29/2008 19 Palm Drive Greenland, NH 03840 $282,000
01/28/2008 2 Acorn Londonderry, NH 03053 $280,000
02/15/2008 115 Pheasant Run Drive Chester, NH 03036 $301,500
01/22/2008 11 Farrwood Road Windham, NH 03087 $339,000
02/22/2008 21 Kenwood Newton, NH 03858 $370,000
02/15/2008 7 Carriage Chase Lane Atkinson, NH 03811 $420,000

Most of them were sold at or near list price.
Web Reference:  http://teamWindhamPelham.com
0 votes
Hi, , Virginia
Tue Mar 25, 2008
would you sell your $400,000 house for $225,000?
there is your answer
the banks don't want to lose $175,000
but some one has to lose
hopefully its not the taxpayer
we already pay too much tax


good luck
0 votes
Eric West, , 03801
Tue Mar 25, 2008
Some of what they are saying applies. A bank does look at the REO as an asset. They also look at current market conditions and are paying licensed real estate professionals to do BMO (Broker market opinion) this should give the bank a good idea of the current market value of the property. What happens in many cases is by the time the bank gets this information and lists the property for sale the market has changed. The short answer is the bank is slow to recognize this change. Just keep in mind that what you are hearing on National news about real estate market conditions may not apply in the area of homes you’re looking at. I have seen a few good deals lately however they are not as good as the scenario you had spelled out with a 65% of FMV. I would say if you can get a property for 75-80% of the current true market value it is a good deal. Just remember the banks know this too and once they have spent the money to bring it into foreclosure they are looking at what the expenses –vs- return going forward, they have already eaten the cost of the foreclosure. So if they hang on to that property and get 10% more that gains them $22,500 to cover the costs of carrying the property for 6 more months.
0 votes
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