What banks aren’t telling their shareholders. The truth about reducing bank losses through pre-foreclosure liquidation solutions (short sales).

 

 

WASHINGTON – During the recent housing slump and related mortgage crisis, there has been a significant increase in the number of foreclosures around the country. That’s no secret. The real story seems to be the willingness of banks to let the majority of these properties go thru the entire foreclosure process when alternative solutions are available, and more importantly, less costly to their shareholders. What has been a seldom used and rarely discussed option for homeowners in the past, the short sale should take on an increasingly more prominent role at many of the nation’s banks if they adopt a policy of asset and equity protection. At this point however, the red tape at these banks is choking the system to a point where it is too complicated to help the homeowner.

 

By keeping the homeowner involved in the selling process and in the house, the value of that property is retained. The minute the house is abandoned, heat is turned off, weeds grow, and vandalism takes it’s toll. The value of that property diminishes in some cases by 50-60%. The brunt of those losses are the burden of the shareholders, not the managers that seem to ignore the problem because it is easier to let the property go to foreclosure. Massive right downs and capital raising events destroy shareholder value thru reduced share prices and dilution. Add in the costs associated with the foreclosure process itself such as attorney fees and these companies are literally throwing billions of dollars down the drain. There is no doubt that there will be losses anyway, but they can be reduced if these banks become proactive at protecting their shareholder value. So why aren’t they actively working with homeowners and companies to help save this equity?

An explanation of a short sale may be in order. Essentially a short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagee. Extenuating circumstances delegate whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation. A short sale typically is executed to prevent a home foreclosure. In theory, a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing.

The Red Tape Effect

Most banks follow a pre-foreclosure format that includes:

1.        Contact by the owner to discuss potential workout solutions.

2.        A hardship package (describing the homeowners financial situation).

3.        Send them an offer and a HUD Statement detailing the banks net on the sale.

This is where the problem begins. The property has to be marketed which requires a Real Estate professional list the home and market it to potential buyers. This can take 60-120 days and costs money. When an offer is presented as requested by the bank, it can take 20 phone calls and 30 days just to get a customer service rep assigned to the case.  It can take 3-6 months to get the bank’s approval on the short sale! What retail buyer is going to wait 30 days to 6 months to find out if their offer has been accepted? That leaves investors who buy property at 50-60% of market value as the only viable buyer of these properties. See the delima? The bank doesn’t want to accept an offer that low. After weeks of hiring appraisers and Broker Price Opinion companies, by the way, the Realtor selling the property has access to the exact same information already and usually sends that in their package, it becomes a wait and see game. If a miracle occurs and you get a short sale approval, it has been common practice for the bank to then begin stripping the commission out from the deal making it impossible to get a real estate professional to take on these cases. Who wants to spend months and money marketing a property only to get their commission stripped in order to get the deal done? Do they begin docking their own employees in this capacity? Maybe they should when bad decisions are being made that cost them millions.

How is asset protection not the most important factor right now in their decision making process? I have no doubt that if a shareholder instead of a manager was the decision maker and was presented the same option of either agreeing to a short sale now and taking a 10-15% loss, or gambling during the 9 months that it will likely sit empty during the foreclosure process that no damage is done, water pipes don’t break, or windows don’t get broken resulting in a 40-60% loss.

The recent market downturn has revealed a significant increase in homeowners needing to complete a short sale. Our website, www.sellmyhouse.com, continues to attract hundreds of daily visitors asking the question “what options are available to me to avoid a foreclosure”. In the majority of cases, they are willing to stay in the house while the property is being shopped for a buyer. What is stunning is the fact that most tell us that their bank gives them very little direction or information about what they can do to help themselves, and lets face it, by helping themselves they are really helping the bank  protect their investment.

With many economists forecasting a down market and the credit crunch estimated to continue through at least 2009, many banks and homeowners will be faced with the decision of whether a short sale is their best option. From our experience, most homeowners will do whatever they can to avoid a foreclosure. The real road block at the moment seems to be the bank unfortunately.

Solutions

  1. Let the professionals do their job! In the end we will help the banks save money and protect their shareholders.
  2. Offer mortgage incentives to qualified retail buyers of these properties.
  3. Let real estate networks like www.sellmyhouse.com market the nice homes to find somebody who is going to move into it. They pay retail prices, investors do not. Sell houses in need of work to investors. They are taking the risk of renovation and deserve a profit.
  4. Finally, pay the Realtors. Is it good business practice to cut their commission at the last minute after they have spent hours and hours working to help you SAVE MONEY! The fees being charged by these short sale negotiation companies could be avoided if the red tape is reduced.

 

So why aren’t banks actively working with homeowners and companies to help save this equity? There are hundreds of thousands of homeowners around the country and millions of bank shareholders that are asking that same question.

Jason Roberts is President of www.SellMyHouse.com, a leading provider of real estate information on the internet. The company is backed by a national network of local real estate professionals that handle the service needs of clientele that include for sale by owner advertising, MLS and flat fee listings, online bidding platforms, and pre-foreclosure solutions for banks and homeowners. Jason is an expert in the real estate community with 20 years of investment, marketing, and realty experience. To contact www.SellMyHouse.com please call 888-557-2772 or email Jason your questions/comments at BusinessDevelopment@SellMyHouse.com.