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Throw the Lenders Your Keys, But They’ll Throw Them Right Back
October 3, 2009 by Neil · 5 Comments
Many homeowners with negative equity in their homes and a rising stack of unpaid bills took to throwing their housekeys to the lenders. The lenders, in turn, would conduct “short sales,” where the sales price invariably limboed under the original sales price. Now, more lenders are forcing the sellers to pay extra money at closing. Others want a promissory note for part of the amount due.
For those who pay their bills on time, and have not been significantly impacted by the economy, congratulations (to both of you). Unfortunately, though, 17% of the nation is unemployed or underemployed. Half of all homes will have negative equity by 2011. Seven million housing units comprise the shadow housing inventory that has not been factored into Case-Shiller’s known housing numbers. Housing values will continue to plummet as housing supply increases.
If banks take a hard line with borrowers now, what are they going to do when this fecal storm cranks up a few notches? In fact, banks would make more money if they work with a short seller. An analysis by Clayton Holdings Inc., which tracks mortgage loans for investors, found that short sales result in average loan losses of about 19%, compared with an average loss of 40% for homes sold after foreclosure.
Indeed, every few years, banks find new and innovative ways to lose money. But still, it begs the question: why are they being so pig-headed to the detriment of their bottom lines?
The answer is that dreaded 4-letter F-word. F-E-E-S. (This is not to be confused with another four-letter word explanation for former Congresswoman Cynthia McKinney’s election defeat, according to her father.) And this time, banks are not to blame, directly anyway.
To quote Upton Sinclair again: “It is difficult to get a man to understand something when his job depends on not understanding it.”
Service providers and their employees may have a fiduciary duty to salvage the defaulted loans for the banks. This, however, often gets subsumed by their own self-interest in amassing fees.
A BofA VP called Jenson back that night, gave Jenson his cell phone number, told him, “We’re in this together,” and followed up every week. Jenson, however, never returned any of the calls.
Back to reality:
BofA responded four months later, saying it wanted an additional $19,000 in cash from the seller, or a $38,000 promissory note payable over 10 years. When the homeowner wouldn’t come up with the money, Jenson agreed to give the bank $7,500 of his commission. BofA agreed to the terms. But by then the buyer had walked away.
This reflects my experience as a commercial real estate broker to a tee.
A recent short sale I worked on involved multiple properties, overleveraged with the help of no fewer than five financial institutions. In order for the deal to have succeeded, all five lenders had to agree to take a significant, but not life-threatening hit on the face value of the note. Some lenders were surprisingly cooperative, but others threw every conceivable bureaucratic road block in front of me.
The more egregious defenders did one or more of the following:
denied they received the faxes I sent by electronic fax (repeatedly);
required several years of borrower W-2s;
took months to arrange appraisals because they would only use one company;
refused to communicate by email (for fear of leaving an objective trail of events);
passed the file around to different people, and arbitrarily changed the designated contact person, requiring the process to start from scratch;
inserted multiple, unnecessary layers of bureaucracy to the process (which makes mortgage companies’ cries of being overwhelmed fall upon my deaf ears)
refused to deal with me directly, despite authorizations from my client
refused to modify the loan at all, perhaps on the mistaken belief that “property values are going to come back around in the next couple years, so why sell at bargain basement prices now?”
A recent report from the OCC indicates that loan modifications may not be working. The obvious response would be that overleveraged folks still can’t afford their homes. I submit a more nuanced response: the loan modifications did not go far enough. And we already see that service providers stand in the way of loan modifications to their own betterment. The least worst solution I see to all this was proposed by Marty Feldstein in the Wall Street Journal a few months back: get the government to refinance the underwater residential loans with a very low interest rate. In exchange for this generosity, the borrower will have to sign personally. The rate will be lower than what’s keeping the borrower underwater. Uncle Sam will still make money because his cost of funds is near zero. Fewer homes will need to be foreclosed. Available housing stock will shrink.
Followers of this blog will know there is a Plan B, which would work in conjunction with this Plan A. Unfortunately for us all, neither plan will be implemented anytime soon. If neither plan will be implemented anytime soon, I do not see multifamily values recovering from their peak for a long time.
N.B. The painting above, FYI, is “Christ Handing the Keys to St Peter,” by Pietro Perugino (1481-1482). The thumbnails can’t all be pop culture.
I actually do not believe in your plan B. If i recall you want government to help with loan modifications. Where does that leave people who did not drink from the well?
Itay,
If I understand you correctly, your frustration is that some people are getting government assistance, while the folks who played by the rules are getting nothing. This is a perfectly valid frustration. I am actually in favor of government refinancing all first mortgages of primary residences, not just the distressed ones. Not only will this help the folks who are underwater on their equity and bills, but it will also assist the people who play by the rules. Across the board, this will give Uncle Sam a profit on these loan. The people who play by the rules will benefit as well, and pump more disposable income into the economy.
(PS My Plan B is increased immigration, especially those with postgraduate degrees. Another posting documents how such immigrants have been crucial in creating new companies that in turn generate new jobs. Plan A is to modify the loans, which I believe is where we apparently disagree.)