REO Listings: Why Are Lenders Denying Short Sales?
When a Foreclosure Solution Gets Short-Circuited
In this time of record-breaking foreclosures, many Americans, battered by the recession, find themselves without many alternatives to losing their house. One such alternative, the short sale, in which the homeowner is allowed to sell their home below the value of their mortgage, was one way that someone could get "out from under" a home loan they could no longer afford.
However, the biggest impediment to a successful short sale is often the lender who holds the mortgage. Because there is no short sale process set in stone, the approval process is inconsistent, unpredictable and all-too-frequently blocked, even when it's in the lender's best interests.
In a recent article, "The Boston Globe" detailed the ordeal of Christopher and Linda Robbins, who were ecstatic that they had managed to find a buyer for their condominium which they could no longer afford. That joy turned to sorrow and disappointment when they learned their mortgage holder rejected the deal. The reason? The condo was worth more than what the buyer was willing to pay.
Instead, the parents of two small children went through the painful foreclosure process. A few weeks later, the lender put the home back on the market - at a price of $7000 less than what the short sale buyer had offered them. Now the family has moved out and the condo remains empty, with no buyer in sight.
Why are lenders denying such transactions, when clearly, it's financially the best move for them as well as the homeowners? These kinds of foreclosures are frequently sold at auction for less than the mortgage holder would have made in the proposed short sale.
"The irrationality in which these applications can be dealt with is absurd,'' commented Thomas J. Percy, managing partner of a law firm that represents sellers and lenders in short sales, to the Globe. "You can get vastly different answers depending on, among other things, which bank negotiator you end up with.''
Lenders say the reason they turn down many short sales is because they are concerned about fraud. Around one in 50 transactions become piled up with difficulties. Frequently, problems occur because an investor hires a real estate agent to assess the property for less than its value. That investor then buys the property in a short sale and immediately turns around and sells it for a higher price, in a process known as flopping.
The banks lose around $300 million a year because of this kind of fraud. The question, however, is how much are they losing on the other honest transactions that they're stopping in their tracks - transactions that, by the lenders' own admission, make up the overwhelming number of short sales?
In a market where lenders are holding hundreds of billions of dollars of REO properties, this is a question they need to be asking themselves.
About the Author
Frank Patrick is the founder of ASREOS (the American Society of REO Specialists), the first professional association for REO Agents created by REO professionals and contains numerous resources and tools to maximize REO opportunities and find REO listings - as well as the ability to interface with other REO Agents across the country in an exclusive forum. Find out more at http://www.asreos.com
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