Last Friday the Huffington Post invited readers to share stories of short sale woe.
In a short sale, a distressed homeowner avoids foreclosure by selling his home for less than the value of the mortgage. While the lender loses money on the sale, it is less costly than if the bank forces the homeowner to go into foreclosure.
But lenders, preferring to delay hits to their balance sheets and to avoid disentangling complex securitized bundles of loans, tend to stick with the more familiar foreclosure process, losing money for everybody.
Art David, a realtor in Naples, Fla., wrote to say that the government ought to do something about the problem. He suggested a short sale credit "to break open the logjam of properties that are being held up from being sold as a result of the banks' reluctance to deal with them." The Huffington Post reported his suggestion on Tuesday.
Tim Geithner is apparently an avid HuffPost reader.
On Thursday, the Treasury Secretary announced a new program to give lenders and mortgage services some incentives to do short sales: up to a thousand bucks for a successful short sale. It's not quite what David had in mind, but it's better than nothing.
"It's a positive step," David told the Huffington Post.
David was one of more than 50 readers and counting -- real estate agents, homeowners, would-be buyers -- who wrote in to share their stories.
Here are just a few of them:
William and Theresa Taylor of Sacramento, Calif. had a $372,000 mortgage with Countrywide. They got an offer for $325,000. The bank dragged it out and the buyer walked away. Now offers are coming in at around $300,000. Bank of America, now the owner of Countrywide, is rejecting them.
"My husband and I honestly do not care at this point if it goes into foreclosure because we felt that we did the best we could and we were even trying to do the right thing by the bank, by getting a real estate agent to help us short sale the house," wrote Theresa. "The banks have screwed us, and it is time for us to stop participating in their economy."
Wendy Piersall of Illinois wrote that an investment property she owns appraised at $285,000 in 2006. Two years later, her renters stopped making payments. After six months of no mortgage payments, Piersall wrote her banks to say that she had "solid offers" for $225,000 and $220,000. The offers didn't go through: "The mortgage companies took so long to respond we lost both offers," she wrote. The lenders eventually agreed in November to sell the home for $185,000.
"We bought the home in 1999 for $130K and did over $100K in renovations to the property," Piersall wrote. "So it was a huge waste of everyone's time and resources to go through this and have it end like this."
John and Debra Shutz, down in Palm Beach Gardens, battled with Countrywide. At the same time that the Shutz' bought their home in early 2006, for $320,000 with $45,000 down, John injured himself in a motorcycle accident. Out of work, they tried to sell the property into a sinking Florida housing market.
Countrywide encouraged them to try to short sell it, while also bombarding them with debt collection calls. The condo was eventually appraised at $160,000, but the couple managed to get a $200,000 offer. The deal would only go through, however, if the family could come up with $50,000.
"Hello, if I had $50,000 I wouldn't be in this mess," wrote John. "The phone calls stopped for awhile then I got one that just about made me start laughing it was so sad. The caller represented Bank of America. They bought Countrywide and they wanted to know why we weren't making payments on the property!"
A perfectly succinct story from KP, a Maryland reader:
We bought our property back in 2006 for $300,000. I lost my job January 2009. We started the short sale process and received an offer for about $225,000. The bank declined it and said they need at least $255,000. Another offer came in soon after for $255,000 and then the bank declined it and requested $259,000. The buyer walked away. Now the bank wants to foreclose. They are only days away from starting the process and we received a third offer last week and the bank doesn't even want to talk to us or the real estate agent. They are not responding to our calls and faxes. Our mortgage is at Wachovia.
Clinton Wheeler wrote:
Good friends of mine lost their home to foreclosure. They had taken on more than they could afford and when they tried to refinance the market had already begun to crash and their home was worth less than what they owed. They held mortgages for about $400,000 and couldn't keep the home. They had listed it on the market and the best offer they received was for $265,000 which the bank declined. The initial offer was less but they were able to talk the prospective buyer into offering a bit more. After foreclosure the house was auctioned for only $165,000. At that price the new owner got quite a bargain at only about $55 per square foot when the average home in that area was selling for over $100 per square foot the year before.
I can't even begin to understand how a bank can be profitable when they are dragging their feet on short sales and losing quite a bit of money in the process. Luckily my friends were able to get into another home but they are now in the process of filing bankruptcy and I can still remember how excited they were when the staff at KB Homes had told them they were able to afford the home of their dreams. The financing was an ARM and the payment went up before they even set foot in the house and when the property taxes kicked in after the first year they didn't have a chance at making the mortgage payments anymore. In their subdivision about half of these brand new homes are sitting empty waiting to be auctioned, some even before the new homeowners could move in.
"The mortgage company talked me into a 'sweet deal,' as the loan officer says. My home was appraised at $580,000 [in 2006] and I ended up with a $460,000 ARM loan, with the intention on selling the home after the renovations," wrote Banks. She then became the victim of credit card fraud, which tanked her credit and complicated her finances, and she couldn't work due to an illness. The house didn't sell as the market plummeted. Once she got into short-sale territory, the bank began blocking sales.
Wrote Banks: "We have had many offers and it has taken almost a year and the offers have come and are gone because the bank has been dragging its feet on it. Now my home has been vandalized and lots of fixtures were stolen and the beautiful home with custom cabinets, beautiful pine wainscoting, designer kitchens and baths, in-ground tile swimming pool, beautifully landscaped, and many other amenities are now going for a mere $185,000. My credit is completely shot and so is my health. I now live with my daughter and grandchildren and have no health insurance."
Hugh and Roshni Freebairn have an offer in with Washington Mutual with proof of funds. They've been waiting a month, a short time judging by the standard wait we're hearing about. "If the bank doesn't approve we will just give up on short sales and try to find a decent foreclosure, but that is difficult since most foreclosures are really trashed out. We looked at one where the previous owners had poured concrete down the drain as an act of spite against the bank."
One "concerned house shopper in Fort Meyers, FL" wrote of the rampant fraud he and his wife have uncovered as they search for a home in the epicenter of the foreclosure crisis. Their story is a reminder of how far the market had spun out of control, and how the banks sometimes become victims of the slap-happy culture they fostered.
"On our most recent offer on a house that is being sold in a short sale, we put a reasonable offer on the house but the woman that owns it would not sign the contract. What is odd about her situation is that she had the house completely paid off a couple of years ago, only to then take out a mortgage of about $330,000, after which she is now in foreclosure. We were told she bought a house in Kentucky and does not care about the house in Fort Myers. My guess is that she borrowed the money for the Fort Myers house, bought the house in Kentucky outright, and is now stiffing the bank for the balance."
Michael Levin put in a $180,000 short sale bid on a house in Columbus, Ohio. He upped it to $200,000 and a bank in California, which held the note, asked for $209,000. He agreed. So they asked for $219,000. The house had deteriorated over several months, as had the market. He said no and walked away. It's now on the market for $209,000 and falling.
"Every day, I thank whatever person or force was responsible for the agent who represented the California bank to ask for $219,000. If the California bank had accepted our final offer, then we would have been boned. I remain baffled by the California bank's behavior," he writes. "Why did the bank not accept our October 2008 offer?"
Margan Green wrote:
My son placed a full price, *all cash* offer on a house for sale in Fredericksburg. It was a short sale, so the bank needed to approve the offer. The bank ignored the offer, and the house was scheduled for foreclosure two weeks ago. My son was there, with his certified funds, to bid on the house. But the auction was postponed, because they said Freddie Mac had a moratorium on foreclosures. So time passes by. No one can tell my son what will happen, and I'm sure he will find something else, because he is motivated and he has the cash.
REAL ESTATE AGENTS
Bruce Lucas with Keller Williams Realty wrote to say that while banks are taking time to decide, "the property remains active on the Multiple Listing Service and is still being shown to other potential buyers who may submit offers that are more profitable for the bank than yours. So after waiting all of this time someone can come in at the 11th hours and have their offer accepted over yours and you have to begin the process all over again."
Lucas said he and other realtors have noticed a pattern with short sales and other efforts at mortgage modification. "It seems that the paperwork has to be submitted several dozen times only to finally get a response saying the modification was canceled because either the paperwork was missing or is now outdated."
Candice Sullivan, a realtor with Country Estates in Solano County, Calif. wrote of one family who bought a place for $825,000 in 2005. They put $200,000 down and took out a standard 30-year fixed-rate mortgage. The family ran into trouble three years later when the father left. The bank blocked all efforts to modify the mortgage or work out a short sale. The mother of two has a good-paying job and could have a afforded a modified mortgage, but instead it's on the way to foreclosure, where Sullivan guesses the bank will be lucky to get $400,000. Subtract from that the legal expenses of foreclosure, and the bank is costing itself hundreds of thousands of dollars needlessly.
"The irony in all of this," wrote Sullivan, "is that if the lender had just initially worked with Beth on a mortgage workout none of this would have happened. She is an educated woman with a good income and could easily have afforded her mortgage if they had worked with her. In markets where homes values have declined up to 50 percent the mortgage crisis hits everyone. The solution is simple the government needs to mandate lenders to rewrite mortgages with 3-5 year pre-payment penalties if seller is to sell at a profit. Their faulty loans become A+ paper, it costs banks nothing in comparison to all of the fees and commissions paid in either a sort sale or foreclosure, not to mention the emotional and economic toll it takes on all parties and communities involved. Then again, the banks and government obviously don't care."
Robert Searcy, a realtor in Houston, sent in a listing for a property now going for $190,000. The bank, he said, previously rejected a $209,000 offer. He gave up and doubts, at this point, that they'll get what they're now looking for.
Ulysses Torassa, a realtor in Northern California:
"I'm a real estate agent in northern California and have seen how horribly banks have acted in the short sale process -- passing up the chance to get 75% of their money back only to find they end up with 50% or less many months later because they wouldn't agree to the short sale."
While the market burns, some lenders and servicers are doing whatever they can -- legal and otherwise -- to grab a few bucks on the way out the door before the whole thing goes up in flames.
From Peter J. Pike, an attorney in Florida. Follow along, this one gets interesting:
The price offered (after being on the market for years, constantly dropping the price until offers came in, which is truly the only way to determine what the true fair market value is of a home), was not enough to pay off the first mortgage. After about three months of negotiations (actually, just waiting - negotiations indicates that we were going back an forth on issues, the only back and forth involved Wells Fargo losing our file on more than one occasion), we were told that FHLMC [Federal Home Loan Mortgage Corporation] would approve the short sale, allowing the second mortgage to be paid approximately $3,000.00 (10% of the amount of the second mortgage) out of their proceeds. They also wanted the Sellers to bring $10,000.00 to closing, to make up some of the deficiency. My clients were able to borrow the $10,000.00 from their parents and siblings.
Not so fast, said Wells Fargo Home Equity. They also wanted $10,000.00, not $3,000.00. When I pointed out that the first mortgage holder (remember, also Wells Fargo) would not allow us to make any additional payments on the second mortgage as part of this transaction, they suggested that the Sellers borrow more money from their family, and just "make a pre-payment of principal on the second mortgage, before closing. There's nothing illegal about doing that, is there?" I pointed out that under Federal Regulations, it felt to me that they were suggesting that we commit bank fraud, so, I asked them to give my clients a get out of jail free card, in the form of a letter, on Wells Fargo letterhead, spelling out exactly what it was they wanted my clients to do, and opining that there was nothing fraudulent about it. Not surprisingly, they were unable to put anything in writing. I then asked them to speak with the negotiator from Wells Fargo Home Loans (the first mortgage holder), to work out a way that we could pay the additional $7,000.00, without breaching any ethical, moral or legal boundaries. They had the nerve to lie to me (okay, not out and out lie, just fail to tell me what really happened) by saying that "the only way we can get approval on this deal is if your client makes the pre-payment of principal prior to closing". I had already spoken with the first mortgage's negotiator, who told me in no uncertain terms that Freddie Mac would not allow any payments to the second mortgage holder prior to closing. The only thing they would allow would be for my clients to sign a promissory note at closing (which, my clients were willing to do, and offered to do).
Adding insult to injury, Wells Fargo Home Equity (second mortgage holder) sent an approval letter, stating that they would allow the short sale only if they got $10,000.00, but, they would not forgive the balance of the debt. Rather than getting $3,000.00 honestly, or even $10,000.00 dishonestly, they put the end to the entire deal, since I had no explanation for my clients when they asked, why should we borrow $17,000.00 from family, that we will have a really hard time paying back, when we will still owe over $20,000.00 that we cannot pay back?
I am appalled at the severe conflict of interest at Wells Fargo on this (and I am certain many other) transactions. Their refusal to act honestly (in the name of generating more money for Wells Fargo), cost our federal government (we do own Freddie Mac now, right?) the maximum amount of money we would see on repayment of the first mortgage. It also should (but, try to find the right people to tell this to) cost Wells Fargo their servicing contract with Freddie Mac (after all, they forgot their fiduciary responsibility as servicing agent on the first mortgage, in order to try to line their own pockets at that first mortgage's expense).