Banks refusing deals to avoid home foreclosures
By Laura Elder
The Daily News
Published January 24, 2010
Property owners hoping to avoid foreclosure by selling their houses for less than they owe on them are watching deals disintegrate as lenders stall or renege on agreements to accept so-called short sales.
Despite federal efforts to stem foreclosures, buyers, borrowers and real estate agents across the county are watching in dismay as banks drag their feet or decline to accept a sale price on a property that falls short of the amount owed and forgive the balance, even when it would benefit lenders.
For borrowers, short sales are preferable because the transaction is less damaging to their credit record than foreclosures. Although lenders lose money on short sales, they’re financially better off than under foreclosure, industry observers said. And communities benefit from short sales because too many foreclosures can send appraisals south.
“A short sale will provide 20 to 30 percent higher price for the bank than a foreclosure,” John Freeman, an agent with Coldwell Banker United in Galveston, said.
The homeowner’s credit is dinged, but not as bad as it would be in a foreclosure, Freeman said.
“The bank recoups more money and neighborhood values are stabilized when compared to a foreclosure,” he said. “The home doesn’t sit vacant and fall into disrepair.”
Feds Intervene
Yet, complaints about stalling tactics by banks on short sales have become so prevalent the U.S. Treasury Department late last year issued guidelines prodding banks to respond to offers quicker.
In short sales, borrowers are responsible for finding a buyer, but mortgage lenders must decide whether the offer is reasonable.
Under the new rules, lenders would have 10 days to respond to offers.
In short sales that meet guidelines, sellers would receive $1,500 in moving allowances and lenders would get $1,000 to cover overhead costs, among other incentives.
The rules, which take effect April 5, would apply to lenders participating in the federal Home Affordable Modification Program. Those include Bank of America and JP Morgan Chase. There’s debate about whether the rules could be enforced.
Too Late For Persaud
Whatever the case, the new guidelines are too late to help Chandra Persaud, who since April had attempted to short-sell her West End vacation house. Bank of America foreclosed on the Pointe West house last week.
Persaud said she thought she was making a safe investment when she paid $350,000 for the house in 2005. Then the real estate market crashed.
She approached the bank in March about a short sale when it became clear she would drain her savings keeping up with the mortgage, insurance, taxes and increasing homeowners association fees, which rose after Hurricane Ike struck in September 2008. Persaud attempted to rent the house but couldn’t get enough to offset expenses, she said.
When Persaud approached Bank of America, she had not missed a payment. But bank officials told her she would have to be in default before they would consider a short sale, she said.
She stopped making payments and the bank agreed to consider a short-sale offer, she said.
The 57-year-old nurse midwife owes $295,000 on the property. When she put the house up for sale, she quickly got an offer. But the prospective buyer backed out because Bank of America took so long to respond, Persaud said. But then came another prospective buyer with a cash offer of $245,000 and perhaps a little more, she said.
‘I Didn’t Want To Walk Away’
But months passed and Bank of America didn’t respond to the offer, Persaud said. Finally, last week, the bank declined to allow Persaud to pursue a short sale, not because officials didn’t like the offer, but because Persaud paid the principal early on her Pearland home, she said.
The reasoning was that if Persaud was able to make an early payment on her primary mortgage, and because she had not lost her income and had some savings, she wasn’t the victim of financial hardship.
Persaud was hoping to preserve her credit record and also help the bank recover some of its money, she said.
“I felt obligated to take care of this; I didn’t just want to walk away,” she said. “I bought it, and I do have a responsibility. I’m absolutely disappointed they declined a short sale.”
‘There’s A Tension’
Just days later, Persaud was locked out of her house and had to fight to get her possessions, she said.
Officials with Bank of America did not respond to a request for interviews.
Freeman, who was working to help Persaud sell her house, said Bank of America has been particularly aggressive in foreclosures.
After taxpayers spent billions bailing out banks, including Bank of America, which received $25 billion in capital from the Treasury’s Troubled Asset Relief Program, some homeowners expect better treatment and a little more leniency, consumer advocates said.
Banks should work harder to stop foreclosure and to keep consumers in their homes, said Danna Fischer, legislative director of the Washington, D.C.-based National Low Income Housing Coalition.
At the same time, no one wants banks to make the same poor decisions that got them in trouble in the first place, Fischer said.
“I think there’s a tension between the expectation that institutions operate in a safe and sound manner and the expectation that they will somehow do good for the community because they received financial bailout money,” Fischer said.
Short Sales On The Rise
Although still a relatively small part of home forfeiture action, short sales are on the rise, according to the Office of the Comptroller of Currency, which regulates national banks.
The number of short sales completed by national banks and thrifts rose to 31,000 in the third quarter of 2009, up 127 percent from a year ago and up 22 percent from the previous quarter, according to the regulator.
While short sales are an option to avoid foreclosure, they’re not meant for people who have means to make their mortgage payments, Bryan Hubbard, a spokesman for the OCC, said.
“Short sales are complicated, case-by-case decisions that are reached mutually between the borrower and the lender and are used to assist people who cannot afford to meet contractual obligations,” Hubbard said. “They’re not intended simply to help those who choose not to.”
Although short sales are preferable to foreclosures, many variables come in to play that slow transactions, said J.K. Huey, who heads up short sales for Wells Fargo, which last year began working to hasten such transactions through automation and technology.
But matters get complicated when there are multiple lien holders and mortgage insurers and other parties involved, Huey said.
When Wells Fargo is holding the note it can make decisions more quickly, Huey said. But if it’s servicing the loan for entities such as Fannie Mae or Freddie Mac, the largest sources of money for U.S. home loans, it must comply with their guidelines.
Short sales also can stall when borrowers are unable to provide documentation proving financial hardship, Huey said.
Still Waiting
Florida resident Andrew Schneider is awaiting approval by Bank of America for short sales of two lots he bought in Pointe West. Schneider, a few years ago, paid $85,000 each for the lots. He owes about $57,000 on one lot and about $65,000 on the other, he said. A buyer is offering $25,000 for each, he said. He’s waited six months for Bank of America to decide, he said.
Schneider owns 16 investment properties he hoped to sell for profit when the market was strong. But after the market crashed, he’s been unable to sell and is struggling to make $40,000 a month in mortgage payments, much less cover the taxes and homeowners association fees, he said.
Schneider said he understands banks are under no obligation to accept less than what he owes. But all parties would benefit from a short sale, he said. Like Persaud, Schneider is even willing to work out a payment plan on the balance, he said.
Bank of America keeps requesting paperwork he’s already submitted, he said. And he’s never able to get through to someone to discuss options.
“They’re stalling tactics,” he said.
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