Saturday, January 24, 2009

The Truth about Short Sales

Firstly I would like to recommend to everyone to stop listening to people who talk about short sales but have never actually carried out one or if they have it may have been one or two.
I have carried out over 400 short sales and I will now give you a synopsis of the truths behind short sales.
Unfortunately, most people listen to realtors or attorneys when it comes to short sales and most of them do not understand the underlying details and the technicalities of a short sale. I hope by the end of this column that you will be enlightened in the world of short sales by the information in which I am about to give.
It has been said that the Short Sale is the new kid on the block, the new buzz word in real estate but the fact is real estate investors have been conducting short sales for many years.
So the question is why a bank would take less than what is owed and why are banks taking so long to make a decision on a short sale because we know that they don't really want the house back?
One of the main reasons a lenders do short sales is so they can recoup as much of the loss as possible but that's not all.
Loans are funded to lenders from 'pools' of money from Wall St and lenders are penalized for every foreclosure they have.
For every 100k that a lender forecloses on the lender is forbidden to lend 600k which must be held back.
I.e a loan for $400k goes to foreclosure the lender will lose $2.4 million dollars in lending power, which encompassed by the lost interest payments and foreclosure costs and now they have a house they don't want and cant sell.
When their loss of lending power hits a critical mass then Wall St, calls and tells them to get their portfolio ready and call the loans due. Hence the fall of many banks.
They are much better taking a loss now, no foreclosure, no house to worry about and they still have their lending power.
So now you know why they do short sales, now I will tell you why they don't do it.
Every loan is backed either by a private investor or Government body and every loan has an underwriting criteria.
FHA will accept 82% of the now appraised value as long as it does not exceed 63% of the total indebtedness which includes delinquent interest payments.
Freddie Mac and Fannie Mae will except 90-92% of the appraised value but have a loss severity cut off of 52%.
VA will accept 88% of the now value with a loss severity cut off of 64%.
Private investors can be more flexible but the above have strict rules. Prospecting buyers trying to go in for the kill and putting in ridiculous offers on properties and with real estate agents, not aware of the criteria, they are putting in offers and wondering why they don't get a reply. This is why most of the short sales are being held up.
Real estate agents and attorneys are not taught the criteria's within banks and lenders and that is why many of them fail.
I have personally had offers coming to me for $180k for a house that is worth $450k in today's market. I don't even waste my time presenting them.
I hope this gives you some insight to the short sale from a lenders point of view.
I will be posting and update with the short sale from the homeowners point of view towards the end of the week.
Steve M

Thursday, January 15, 2009

Gov Bailout

Today the Senate gave the OK to release the bailout funds as requested by Barrack Obama two days ago.
Looks like the Senate are on Barracks side already.

But the question remains the same; even after a $350 Billion dollar pay out nothing has changed in the housing market, so where is the money going.

Banks are being told repeatedly to ' start lending' but up until now still nothing, in fact it seems harder than ever to get a loan even for people who have money.

We recently had a client who was buying a $2.9 mil dollar home with a credit score of 825 and a down payment of $1 mil and the loan was declined.

PMI companies are hemorrhaging and no longer want to insure mortgage loans.
Mean while lenders are not doing themselves any favors by refusing to do short sales ( where a lender takes less than what is owed to satisfy the mortgage) and taking houses to foreclosure sale.
This makes no sense at all. firstly it costs the lender/investor over 70-80k to do a foreclosure, then when it goes to the sale they need to foreclose on the amount that is owed.
i.e If the lender is owed $400k for a property but the real value now is only $280k the lender must foreclose on the $400, which doesn't make sense since there will be no third party bidders willing to pay $400k for a house that is worth $280k.
So the lender takes the house back into REO ( real estate owned) and they try to sell it on the open market
this is where the lenders need their heads looked at. The short sale offer would probably be in the region of $260-$270k.
They could have saved themselves the hassle of foreclosure, stopped the bleeding on the loss and prevented the homeowner having a foreclosure on their credit.
Now they have an over leveraged property that no one wants, the homeowner is homeless and credit destroyed, and they have still lost money.
And the painful thing is they will try and sell it at the $260-$280k level... where is the sense.

If the 'People' are bailing out these banks they need to be held accountable and foreclosing properties when there is an alternative is no longer acceptable.

We need a body to over see the banks are making the right decisions for everyone and not themselves as usual.