Tuesday, June 11, 2013

Short Sales Outpacing Modifications

It may come as a surprise to some that banks would prefer that you short sell your property than modify it.  It may also surprise you when I slap that surprise off your face with a little education.  Think of a mortgage as a single share of stock.  At the time that the bank lent the money, it was like a purchase of a stock certificate.  It had a certain value on the market at the time, but the value changes with time.

Like any other stock, speculation has a role to play in "market" value.  In 2007, speculation by both corporate buyers, flippers, and a glut of lending lead to an inflated purchase points.  With the recession, housing, in part because of lousy lending underwriting, took huge losses, some sectors losing up to 70% of value in the matter of weeks.  Bank, though institutional and without flesh and blood personas, are run by humans and the banks did what a lot of investors do at a time of downturn, they sold.

The sale of these mortgages/stocks were done at a fraction of the value that had been paid at the time of lending.  You hear the expression "pennies on the dollar," well that would have been accurate here.  In addition to voluntary sell offs, some banks simply crumpled under the stress.  Lehman Brothers, Wachovia, Washington Mutual, Country Wide were some of the biggest names to blink in the face of the maelstrom that was coming and the assets that represented main street mortgages were purchased pennies on the dollar.

Fast forward about five years and you are contemplating your ability to pay for your home.  It no longer has the value it once did, your interest rate is locked in 2007 purgatory, and you are wondering why you owe more to your new bank than the house is worth.  If I described you with pinpoint accuracy, it is because I write fortune cookies on the side.  The next best option to you is to go to your bank and ask it to modify the loan to a more affordable version for the post-apocalyptic you.

The bank comes back and says no.  It has a myriad of reasons that it hides behind, such as poor DTI, you make too much, or my favorite, your loan doesn't meet investor guidelines.  Let's take a machete and cut through this crap.  What the bank is saying is that because it bought your house for pennies, it can make money simply selling it to whoever is willing to buy it.  If it modifies your loan, then it will have to wait up to 40 years to see a real return on its money.  So thanks for playing but if you don't want to pay, it doesn't care.

In reading through the article linked above, I will admit that my offices have had an above average result in obtaining modifications.  Short sale is usually a secondary option for my clients and the results play out in many modifications.  It has to do a lot with knowing the pressure points, knowing the options, and then being persistent like a Gonzaga Bulldog when it comes to pushing for that outcome.

If modification is something that you crave, there are options available in Washington.  The Foreclosure Fairness Act Mediations provide a terrific forum for us to get results for our clients so that the norm of short sales outpacing mods does not have to be your outcome.

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