Interesting points Mike, I'm still learning when it comes to the Short Sales process and ramifications.

On the flip side (absolutely no pun intended,)  the REOs have set the pricing structure for our market.  It has stimulated our market greatly but I don't see prices going back up any time soon.  Maybe our market is ahead of your market but we already seem to be living this scenario.

Great post and very informative.  I am learning about short sales myself and this type of information is what I need.

Just think what will happen when the banks start accepting all the low, below actual market offers...

Prices will drop to affordable levels relative to income and everyone (homeowners/renters/investors) will start buying again.  Why do elements of the real estate industry fail to understand that unaffordable housing (price relative to income) is bad for the industry?

How many buyers are waiting with 20% for a down payment and enough income to pay the mortgage on the median priced home in your market.  They are waiting because they aren't willing to mortgage their future now that home prices aren't skyrocketing.

The "exotic" loans were a response to prices very few people could afford.

Price was the problem all along.

Good information, thanks.  We will be seeing some of this but not a lot yet.  The whole short sale process is so slow and unfruitful.  I wish they would think of a way to streamline the process a bit. 

I don't think price was a problem all along but availability of mortgage loans.  Tom, Dick, Harry, Spot and Jane used to be able to get in a house with not too much out of their pocket or income to prove.  Now only Tom has the down payment and the income to get underwriting approval for a full doc loan.  It's all about supply and demand.

Jason, I am working in the next level of finance now, where whole subdivisions and entire commercial buildings are on the block, not listed, and the lenders and Courts are looking for ANY takers....My education is far from complete, and the rules are being made up and changed again, daily. I can't predict what is going to happen, but here is an unbelievable amount of property sitting on balance sheets...Its simply huge...The market is going to be forced back into Afordable Housing, and affordable is going to ahve to be more in line with local salaries...AS i see it, we still have a way to go...

I see a lot of big deals , very big deals, that will be hitting the " market in the next six months. These are just the tip of the iceburg......It continues to prove that if you wait, in this market, the price will go lower...i wonder how the appraisals for these projects ever got thru the doors without bumping thier heads on the ceiling.. Anyone that has cash now should be VERY careful,,, what we thought were dy no mite deals 6 months ago are dogs now...sweaty, barking, mangy dogs...What were considered lowball offers are now current pricing ..Good to see ya here.gotta go act like I know what I'm doing!!!!!!!!!

Renee, that is exactly my point.  Only one of the four buyers could legitimately afford a home.  The other three could only afford it if the value went up quickly enough to allow them to refi and pull out cash to pay off their second, get out of their ARM, and even make their monthly payments.  Going back to that environment would be a very bad thing (short term gain, painful crash), so we need prices to fall in line with income.  Real income, like numbers on tax returns, not "stated income", otherwise known (for very good reason) as a "liar loan."

With all of the reporting regarding the number of properties in default or foreclosre, it'd be refreshing to see statistics reflecting the number of properties that have been paid off, owner occupied and off the market. 1 in 10,000 maybe ? Who knows? That might be too much work for the register's office. It's another approach to the consideration of value. The banks play roulette with the house in a volatile market and take their chances on correction or predictions of future value. The problem is that when the property sits on the books for a long time it costs everybody. Sadly, the loss mitigators aren't sitting next to an economist when they reject a short sale offer, even when they're risking losing 30 thousand or more on the court house steps at the foreclosure sale because they refused the short sale offer, because their pit boss told them to hold on, take no offers, while he's watching the market cycle in peaks and valleys and the lender's gambling with the property and seeking market correction. Some lenders are committing self-mutilation.

David, I wonder if the individuals who work for the lenders are reluctant to take responsibility for a real loss?  As long as the property is unsold, it's a paper loss plus a small loss based on the missed payments.  Once it sells, someone is responsible for a number with a lot of zeros at the end of it.

A few years ago I wanted to buy a house, but life's bumps and my own stumbling prevented me from doing so.  I was embarassed to call myself a renter in a world where it seemed like everyone was an owner.  Now, life is where I always envisioned it being and I am proud to call myself a renter.  I will also be staying a renter for some time -- willingly and happily.  I would be regretting my decision today if I had purchased when I originally wanted to.  Not being on the bandwagon back then ended up working out in my favor.  If I would have bought where I wanted to buy, I would be upside down.  Instead, I am paying my rent each month and the house I am renting is steadily turning upside down.  In fact, yesterday I was assigned yet another foreclosure, which is now happening once or twice a week (5 new ones in less than two weeks).  This property is currently occupied and the bank will have to order an eviction.  This particular property will be easy to keep an eye on, since the back of the house faces the back of my own house.  A few weeks ago, in talking with my landlord, I found out who the lender is for my house -- my biggest client.  The foreclosure behind me is also owned by my biggest client.

Frank:  I live in an environment where stated income has his place with many workers using tip compliance.  Many of the homes here are going back to the bank because novice investors (speculators if you will) bought them.  Many of these are tenant occupied.  Many of these committed mortgage fraud.  Loose lending created the frenzy of greed by individuals which in turn created a frenzy of buying which in turn caused inventory levels to drop to record lows and prices to increase to record highs.  I think the occurance of people in bad loans is rare or what was normal before this happened. 

Each market is different and different things happened and we are seeing the same result all over the country.  Places that didn't see ginormous appreciation are also hurt simply because of economic conditions.

We are driving in the same road, just in different lanes :)

Loose lending created a frenzy of buying which drove up the prices for everyone, good, bad, honest, and dishonest.  My point is that many of the people who are going to default when their loan resets simply could not have afforded to buy that home at that price without a teaser rate, an undeclared second, overstated income, or some other "magic wand" that got them into the home. 

The problem is not the novice investors alone or the frauds alone, it is the disparity between home prices and income that caused legitimate buyers to overextend themselves.  We need a price correction so that average working people can afford a decent home without relying on teaser rates and trickery.  At the height of the bubble, middle class families were priced out of middle class neighborhoods unless they cut corners... or stayed renters.

If lenders hadn't come up with tricks to allow buyers to bid more, there would have been fewer buyers, prices would have remained steady rather than ballooning, and we'd be in a normal market as renters became buyers and owners moved up.

But make no mistake, the credit crunch didn't cause the problem, it was a symptom of the problem.  The market turned much earlier which is why those defaults began to occur.  The market turned because the gap between price and income was simply too great to sustain.  The Ponzi scheme of neverending gains collapsed under its own weight.

Frank why should they take responsibility if they're pawns of the industry? They don't feel like they're being paid enough and sabotage deals.

Renee has it backwards. Inventory levels are are at record highs and prices are at record lows.

And I thought it was because they only worked 9-5, Monday through Friday...

Thanks all for the great comments..I will get back indivually later...But a super dialogue was started here...Good job all

Mike - you make some interesting points.  But regardless of how long they "push off" taking back they property, they will take it back.  And - if the market is indeed in store for an even bigger correction - it only makes sense for the lenders to get the deals done today and not keep waiting for values to fall. 

I can understand banks not wanting to hurry into REO status, yet why drag out the short sale process when there are anxious buyers on the line ready to close and prevent REO status altogether?  It's not a pretty picture for any of the parties, but it seems to be a win-win if they can get a majority of the money owed, clear it from the book and go on.  90 days to an answer is pretty frustrating for most buyers.  In fact, a bank is dragging one a deal I am working on and we have a "market value" offer on the table about ready to walk.  When it becomes an REO, they will only be getting about 80% of what is offered to them now ... I guess it's a frustrating process for all and we're all learning the system.  Hopefully with time things will be more efficient and some of these properties can be sold short before driving the values down further with REO status.  Interesting and challenging!

A short sale requires approval of loss.  You want your name on an approval of loss?  I've always thought banks dragged their heels on short sales because no one wanted to take responsibility for the amount of the loss.  If it goes to auction, it's on the guy who wrote the loan or the guy who bought the loan, probably as part of a bundle of loans.

I've always been a proponent of "be careful what you wish for"....well outlined and very thought provoking. I could see if we were in fact talking 50 cents on the dollar though, but we are seeing Banks refuse to answer on loans that are not even 5% low.I see your point, but common sense seems to be thrown out with the bath water.

This was good to read. I am now working on my first listing that might be a short sale. It's a little different. Money is money.

I don't care if they are not responding because there is a chance the deal can happen and the lender prefers it happens at another time.  What upsets me the most is dragging out the answer when the offer does not meet their parameters.  Why can't they just say no thank you, we cannot agree to these terms.  Instead they do not respond for days, weeks or months.

Good point. You are right. If the banks were to take the low ball offers then the market would likely be sent crashing. But the worst right now is that they drag on forever more with out saying yes, or no.

Have any of you had the experience that the "negotiator" for the Seller, ie the agent or the title company short sale specialist, plays any part in getting a bank to respond sooner than later, or do you find that it truly is another file in another pile in the whole system and no matter who is making the phone calls and keeping in touch with the bank, it's going to take that same amount of time regardless?

Kathy, I've seen short sale specialists who claimed that submitting a complete file ASAP is the key to getting a timely response.  I would not be surprised to discover that is true and that the vast majority do not turn in the proper paperwork.  Short happens!

this is what I see in our market.  The short sale sits because the banks are slow in responding.  The lawns become neglected, the house becomes a blight in the neighborhood, many of these were investment homes so they are sitting vacant.  The homeowner wants to sell but is falling further behind.  The picture of the pool in the MLS is cool and inviting, but now the pool is green and disgusting.  The value of the house and the neighborhood is going down.  Agents don't enjoy working short sales because the banks don't respond quickly, people don't like to make offers because they sit in limbo without a response on their offer.

So what are the banks doing?  If the banks backlog of bad loans are growing, they can bundle them and sell them to hedge funds for 20 cents on the dollar.  Hardly smart.  Their best bet is to work with agents and dispose of them in an orderly fashion.  They are absolutely compounding their mistake by not being responsive to agents, it's very foolish.

Mike, I have heard that most of the lenders are short of staff and are unable to handle the increase of default loans and this is what is causing the slow response.  I am still weighing the thought of even getting into the frey of short sales any suggestions?

Don R.

Renee..I have always enjoyed your posts..and have learned a lot about the Vegas market because of your writing...I have an associate that is looking at whether it is time to start investing in Vegas area properties again...The bottom is a tricky thing, but I think we all agree that we can bid down now low enough to cover the last few points..Thanks for stopping by

Sonya...I have dealt with Short sales at many levels..and across a few decades as well...the rule of thumb here for newcomers is.......the rules are always changing....So dont ties up a ready and willing retail buyer on a short sale property...Only use investors on short sales...when they do close, and they will, eventually..your patience will be rewarded without the stress...

Frank...I cannot disagree with any part of your statement...but mass panic triggered by crashing values is something I would like to avoid....It may not be possible to avoid it though

Leslie...if you want to streamline the process, then go to the bank and ask for their REO list..they will sell those NOW  thats allthe streamlineing we will get!!!

I will get back to answer the other comments..Thanks for the star...I am glad to see the thoughtful discussion on a very important topic....God Bless

Your post is food for thought and touches some ideas that I had not thought about.  I sure hope that you'll soon be able to see positive market conditions in Florida. I know you've been hit hard. 

David:  That is how prices ballooned here.  When we saw the imbalance (the inversion) we saw the opposite as you described.  LV inventory is no longer at record highs.  We have been crunching into the inventory since November or December.  Our prices have slid back dramatically because of that.  We are currently experiencing a buying frenzy (the same type that caused our market to balloon to begin with.)  I do think prices will uptick slowly from here on out but not to where we were any time soon.

One topic I've been searching for regarding bad paper held by the Banks, is the effect it has on the Federal Funding/backing of dollars to the Banks.  Banks are penalized by having bad paper on the books. This is the highest level of bad paper held by the banks and it seems they would be anxious to get it off of the books. Does anyone know anything about this subject? My concern is how the banks will survive and the bigger picture of how this will affect the future for all of us.

Hey Mike, Looks like you got a good discussion going here. It's my opinion that another reason banks will decline a short sale is PMI(mortgage insurance). I don't know it to be fact but have spoken to a PMI company directly who stated if the bank accepted the short sale then the insurance would not have to pay. So if the bank foreclosed they would get the 20% if they didn't foreclose and accepted the short they wouldn't. What do you think about that?

good post..the short sales and bank repos are killing the values of homes here in Las Vegas. It is great for the buyers.

Mike

The banks will clear their inventory and they have a lot of it (I know of one package in Lee County of 1400 homes that the bank is just sitting on for the time being and a busted vacant condo complex of 300 units for sale) To sell all this inventory into a down market, it seemes to me,  that prices will have to go down. But as you suggest, the banks will sell sooner or later.  I think its then and only then, that our market will begin to recover. Our market  will be in the hands of real investors (not wallstreet, not speculators and hedge funds)  who will buy these properties and retail them out to homeowners. 

As you suggest,  getting there will not be pretty

That make perfect sense. I often wonder "why are they taking so long to answer" ~ I know that there is a good reason and the reason, in part- may be that the lenders don't want these assets in their inventory,.. so why not just sell!

So many great comments...i just know that when all the short sales start hitting, that will kill the resale market completely...People who need to sell for job relocation, health, any reason, will be taking a bath or worse....The only homes that are getting alot of action around here are New homes, selling in the same subdivisions for $$$$$ less than the neighbors who bought a year or two ago, and short sales/REO properties.

This cycle is pushing even more, formally non stressed home owners into a position they cannot recover from. And then the cycle will continue...fed by its own momentum and self fullfilling projections.

I have business associates that have had their needed lines of credit canceled, and then a letter was sent out to tell them the lender was cancelling all credit lines until further review. This is going to be more than a buyers market, it is going to be a wholesale clearing of Americas Equity for a huge group of individuals that played by all the rules, and got stuck in the mess created by others.

Same here Mike, new homes and reo are moving while resale takes a backseat. Resle here is only moving if itis in great shape and priced lowww.

Mike,

Interesting piece. I've been doing short sales for four years or so now, and some banks are quicker than others. I've noticed that most of the lenders now either have to go to their investor, or a Mortgage Insurance company for approval. The mortgage insurance compannies seem to hold up more deals than anything else I've seen. Some banks seem to want to get cash on their balance sheets and move quicker because of that.

I wonder if all this "bad loan" inventory got dumped onto the market, 1. How long would it take to clear, and 2. How long before normal supply and demand came back.

Josh Holt

www.calljoshholt.com

I absolutley agree and would like to add that I belive that the scenario that you state the banks are trying to avoid may soon become unavoidable and send everything crashing. If the banks continue to experience severe illiquidity then they may be forced to put more distressed loans/peoperties on the market to get liquid again. As you know, the more the market drops, the more it drops. It feeds upon itself, just as it did going up and at that point other banks, investors, and fear-filled homeowners themselves begin to "dump" their properties for fear that the bottom is falling out from under them.

The potential for a serious crash is very real and very scary. Great Post!

Well done, Norvelli. I'm sure this will spin off a few Mike-inspired blogs as well. One of the more creative and paradigm-shifting points of view of late. And you got a gold thingy too!

Fascinating discussion!  I have always believed that the short sale situation was going to get worse before it gets better and most of the comments here would confirm that belief.

I also believe that some areas will have it MUCH worse than others.  Here in Central Texas, I don't think we will take it that hard.  I may be wrong (hope I am not!) but we have a much smaller incidence of some of the preditory lending activities that happened in California, Nevada and Florida.

Mike,

Amen..going through it right now on another short sale. Banks should think about the fact that they lent money they shouldn't have and now don't want to admit mistake so now they will just continue to sit and be stubborn. It's their fault and so if they want to help the people they ripped off then they should take what they can get.

Trust me ...it's a lot less money then to foreclose and then end up selling it for less anyway. Loss mitigation departments do not have enough people to work on these files no matter what they tell you. Hek ..you have to wait at least 30-45 days just to get an negotiator assigned to the file...it's ridiculous.

You will see even more approved deed in lieu because people can't get an approval on the Short quick enough before they have to bail out anyway. Short sales are not for the people that can't wait...it's for people who are investors and can expect to sit on them for years to come. No one even wants to show them because the agents can't guarantee how much they will make and the buyers think they are getting a great deal but don't realize what is in store first.

I feel like Godzilla is waiting in the dark. It's funny but true. Let's not &$#@ ourselves over!

You bring up a major cunundrum with this topic.  I have always argued the basic premise of the basic appraisal.  Appraisers come up with a value based on all the other values in the neighborhood, not the REAL value of the property.  Hence, there is no REAL marketing involved.  There is no salesmanship required because you aren't selling the REAL value of the property, you're selling the comparable value.

It takes salesmanship to sell a property at a higher price than the comps because that property has the value...based on location or amenities. 

When the comps. drop back because of all the foreclosures and short sales, the REAL value of the neighboring properties only drop back because the comps. drop back, not because the property has actually lost it's value to a buyer.

I don't know if anyone is going to follow this but I am advocating a change in the appraisal format.  They ought to include the overall value:  "This property is worth more than the surrounding comps because it is a better property". 

Or:  "the recent comps were all short sales resulting in sales prices below the REAL market value". 

Will that work?

The problem with your "new value" proposal is that value is in the eye of the beholder. It is not set in stone and is soley based on perception. By that point, you are correct in saying that a master salesman could get more for a property than it may comp out at, but that is part of the reason we are in this mess. All it takes is one schmuck to overpay in a neighborhood and that will send all the comps higher. The situation perpetuates itself and the next thing you know you are paying $1 million for a $500k property. I actually sold my mortgage company relatively early in this downturn. I did so because I saw many "schmucks" in the busienss. When amateurs enter the market you can be sure that it's demise is soon to follow. We all saw it in the tech bubble. Amateurs began to invest in faulty investments sending the overall market higher and higher with a feverous pitch. 

The problem is that everyone was a real estate investor, even my pool man owned properties as investments. My piano tuner was also a mortgage broker. We need this correction just to get the amateurs out. A property is worth what a willing buyer will pay a willing seller. We should hope that will someday read, "what a willing AND WELL INFORMED buyer will pay a willing seller."

Keith ...I know many people who are taking their home off the market..This is not the time to be selling if you don't have too

Renne..Again, another good comment...Your market area is the advance of what we will be going thru..

Bo...I think the banks are doing us favors by not releasing the properties and crashing the markets further..just my opinion

Josh...It will take the time based on the absorbtin rate...the probem is the banks / lenders are not going to halp with making the absobsion rate move any faster...We will be continuing to see more and more owner financing

Terri..My other contention is that the banks and others feel that releasing all at once will further create a declinging market, by further devaluing their existing portfolio

Mike - interesting blog.  I have a short sale with 2 liens.  The contract makes the first mortgage holder whole and covers a little over  half of the second... and in this case, the first mortgage holder = which you would think would be happy to have the loan paid off has been impossible to deal with while the 2nd  - SunTrust - I'm giving them credit - they have been GREAT... said from within 24 hours of contact they would take 50% payoff!  go figure!

I think that you may be correct with regard to the properties that are foreclosed on and when the banks decide to foeclose, however, why it takes so long once a property has been foreclosed on has nothing to do with a Bank looking ahead to what might happen to its other mortgages down the road. Banks are making sure that hey are not leaving any money on the table.  This goes beyond the BPO and into all of the assets of the Seller before they accept the deal.  And Banks are very inefficient. . .

Kathy...before my move to my present company, I was very involved in foreclosures and short sales. I just could no longer justify the amount of time I was spending to get one to close..Maybe...Toward the end, I did look heavily at all the companies that claimed to be short sales specialists...What I found was that even those companies could not guarentee much more than a 30% closing rate..But they did have a 100% collection rate...meaning they collected thier fee up front, whether they got the deal closed short or not...Not that I blame them..they promise to bust their butt for their fee....but even they cannot guarentee to get your home closed short before it goes to auction...

Thanks to all who commented..I see I touched a nerve that many of us are fighting thru in this business...Keep on Truckin

Now it is 2 months later..are we making progress with banks yet??