I lost another short sale listing today to foreclosure. The bank literally made it impossible for me to succeed in selling the home. Most people ask, "Why would the bank want to do that? Don't they lose money?" The answer is NO, they can actually MAKE money when they foreclose.
This was explained to me by a loan officer handling the construction loans of my last builder/developer. About a year ago, my builder had approximately 12 new construction homes languishing on the market, no longer able to compete with the short sales, REO's, and existing home sales. Our plan was to rent the homes out until the market stabilized. Unfortunately, the market failed to stabilize itself during 2009. When the builder's loan came up for renewal, the bank reappraised the properties, claimed he no longer had 20% equity, and demanded a very large sum of cash to shore up the accounts before they would agree to renew the notes. Obviously, if the builder hands over all his cash, he will no longer be able to make his payments. He's in a no win situation.
I bundled the homes into an investment package and was successful in securing a cash offer for approximately $200,000 less than the total amount owed on all 12 homes. When I presented the offer to the bank, I was met with an unwavering, "No." This particular bank has already received its "Cease and Desist" letter from the FDIC and regulators. The bank was given 8 months to raise $12 Million in cash, or it would be forced to sell. I would have thought that having a $1.4 Million cash offer closing in less than 30 days would have been appealing to them. But instead, the lender told me, "We'd rather foreclose." What? How does that make any sense? Didn't my market analysis of the properties prove to him that this builder owed more on the homes than the market could bear? How did the bank feel that they could fare better selling these properties than the builder could?
When a bank loans money, they are required to put a certain percentage of the value of that loan into a loan loss reserve. That pool of funds cannot be accessed by the bank, except in an instance of foreclosure. If the bank agrees to the short sale, they not only lose their rights to tap into the loan loss reserves, they waive their rights to pursue the builder for the shortage.
Over 50% of all mortgages are guaranteed by Fannie Mae, Ginnie Mae, Freddie Mac, or an insurance company. If a borrower defaults on a loan, there is really no risk to the bank. Any costs and fees associated with the foreclosure process are also reimbursed by Fannie or Freddie. Oftentimes, this is why the bank is able to list the home on the market for less than they were requiring on a short sale. To quote Matthew Lexus, a former banking executive, "It’s really a shell game of smoke and mirrors. The banks are singing the blues making it appear they are on the verge of financial collapse because of the financial crisis they essentially created themselves."
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Lina Robertson Jones
Owner/Agent
RE/MAX Solutions
1715 James River Road
Ozark, MO, 65721 |
Mobile: (417) 844-7265
linarobertson@remax.net
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About the author: I am full-time REALTOR® with RE/MAX Solutions in Springfield, MO, and a member of the Greater Springfield Board of REALTORS®. I have helped hundreds of families in the Springfield, Nixa, Republic and Ozark real estate markets, whether buying a home, or selling a home. Visit my website at www.ozarks-realestate.com to search for All Springfield MO Area MLS listings. Want to know what our market is like? My website is also an excellent resource for current Springfield MO Area Real Estate Market Reports, as well as current market reports for Ozark, Nixa, Republic, and Rogersville.
In Minnesota, if the first lien holder forecloses, they lose the right to recoup any losses from the owner of the home. Sounds like a bad deal for you in MO.
Joseph - Actually, I did a poor job of delineating between construction lines of credit and permanent financing, or mortgages. In a mortgage-based foreclosure, the bank is unable to recoup their losses from the homeowner; however, in a situation where a builder has a line of credit, the bank can still pursue the owner for the deficit. Thanks for stopping by!
Lina - I wanted to read your post and you confirmed my suspicions ... they are insured for the loan amount so why take a short sale. Thanks for your well written explanation.
Lina - These are strange times. What appears logical is countered by the potential for greater profit. It will take years to unravel the mess that's been created.
Lina, thanks for the post, it is well explained. It just irritates me to know what the banks are doing, and take advantage of someone's situation. I know they are not running charity, I could be wrong, but I still say they are partly responsible for the mess going on.
Lina, this is eye-opening. The training I just went through put short sales as the best option for the banks versus the cost of foreclosure. But your post offers another twist. Thank you for the insight.
I think in Oregon banks can go after for the deficiency. I work with buyers exclusively, so this doesn't come up for me at all, or my clients.
Lina -- we should spread the word. Shame them! Send cppies of our blogs to our legislators, the same ones who chose to rescue these friggin' banks!
Why aren't these people in prison?