Foreclosure Massacre, Not Just a Tucson Real Estate Problem
April 8th, 2008 Categories: Real Estate News
Does The Foreclosure Massacre Have to Continue?
Lenders are losing millions every day. Sadly, they could cushion this loss with a proactive business strategy vice the reactive one they are using now.
How on earth can they save millions of dollars, and why is some real estate agent pointing this out instead of some bank exec that gets paid the big bucks to save big bucks?
Sorry, but this article will only address question number one, for the answer to number two you will need to ask the lender.
The process is simple, and many of us have heard of it already. It is the real estate short-sale. The basic idea is to list a home for less than is owed and to negotiate with the bank to take a lower value. It sounds easy because it is, unfortunately, not all banks are conducting or approving short-sales.
Let me use an example that happened to one of my clients this year. No names will be used in order to protect my client and the reputation of the lender amongst their shareholders.
4 months ago my team got an offer on a short sale we had listed. The existing loan was $183,000. Market value for this particular home was about $165,000 - $169,000 at that time. The offer we received was $159,000. The lender said they would not go below 175,000. Now it is April, and the home has finally been listed by a Realtor that represents the lender.
List price… $153,900.
Common sense is not always a common virtue.
On the surface it looks like the bank may only lose $5,100 but that is not the case. Below are some fast facts from lenders and the Tucson Real Estate Market.
· Monthly cost of holding a foreclosure ~ 1-1.5% (varies by lender) of the original loan - $1,830
· Legal fees associated with foreclosing ~ $3,000 - $5,000
· Property re-key, and clean up (good condition) ~ $500
· Monthly cost of holding the non performing loan before foreclosure ~ $1,830
(In most cases the bank waits 3 months to start foreclosure. In
·
· Average asked to sold ratio
Now let’s do the math excluding closing costs and commissions.
Offer – Non performing loan period of 6 months – Original Loan = Loss
$159,000 – $10,980 – $183,000 = –$34,980
Seems rough, but if you are a shareholder in the company, you would want your loss to be as low as possible. Let’s look at the foreclosure route.
Foreclosure: We will assume an offer on par with current asked to sold ratio
Car accident or train wreck… which would you prefer?
Sadly, the lenders pick train over and over again.
We have had about 8 transactions with fair offers in the last six months that lenders did not approve. We have also had others that were ridiculously low, and I can’t blame the bank for not taking them. With the 8 realistic offers above, the bank could have prevented the extra loss of $26,804. That times 8 and we are looking at excess loss of roughly $214,432. How many times is this happening a month?
On the transaction above I remember the lenders loss mitigation employee saying “We will take no less than $175,000” and I said, “The house will not even appraise or get financing for that price, lets be realistic, save money, and keep this home from foreclosure” the answer “Well I guess we will see what happens after foreclosure” and he hung up.
This does not have to continue, if we multiply the situation above by the number of short sales denied every day across the country, we would probably be around $20 MILLION a week!
The only item we need in place to correct this issue is a proactive system that can quickly evaluate property values in order to allow bank loss mitigation departments to make the decision that will lose their company less.
We have that system. Appraisals and/or Broker Price Opinions (BPO’s) are reports that take 2 – 4 days to complete, cost relatively little money, and provide an accurate assessment of the current market surrounding a property.
Unfortunately, these are already in use, and lenders continue to pick the train wreck. I don’t know what they have in their playbook, but it would likely not compete with the New York Giants, or the Miami Dolphins for that matter. (
Beyond losing their company money we have the question of corporate social responsibility. If these lenders were selling homes sooner under a short sale scenario, values could remain more stable. Right now many homeowners are angry with banks because they can not keep up with the price reduction race to the bottom. Once the lenders own enough homes in a particular area, they control the market value.
A proactive approach to this situation would have the following positive outcomes:
1. Reduced loss for shareholders
2. Less foreclosure inventory
3. Home values will stabilize faster
4. Consumers may respect lenders for their proactive efforts
5.
If any of this bothers you, call a news station. Together we stand and divided we fall. If the call to action is great enough the lenders can’t help but listen. When I get on the phone with them and try to convey the best course of action I am looked at as a sleazy salesman trying to take advantage of a bank. That is why they are rude on the phone and hang up.
The numbers above don’t lie, and if we work on spreading the truth about how bad banks are handling our current situation, they will have to make corrections. If I were a shareholder in a company and knew that they had no concern for a difference of $26,804 on a transaction, I would want to take my money elsewhere.
4 Comments »
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it’s crazy to think that this has become such a widespread problem.
I have a friend that sells mortgages and he can’t even get a loan for them. I guess the banks are just not lending!
Dave Eshleman
Comment by Los Angeles Real Estate — April 26, 2008 #
Thanks for the insight on foreclosures.
Mahalo,
Keahi Pelayo
RE/MAX 808 Realty
Comment by Keahi Pelayo — May 15, 2008 #
You would think lenders would be fighting to do short sales but we aren’t seeing that happen either. It is taking weeks to get a “negotiator” to even begin the process. By then it is often too late.
Comment by Susan Hilton - Texas Aggie Realtor in College Station Home Sales — June 8, 2008 #
Your blog is interesting!
Keep up the good work!
Comment by AlexM — August 16, 2008 #