Why Short-Sales Are Being Rejected

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

Foreclosure Mills Get Rich With Fraudulent Foreclosures

EDITOR’S NOTE: In my opinion, for the reasons stated below, the policy of rejecting short-sales and proceeding with foreclosures creates a greater loss for the bank’s earnings statement, a decrease in the actual capital structure, and therefore constitutes shareholder fraud and stock manipulation. Management is intentionally incurring losses, using the accounting rules to make their financial reports look better than the true condition of the company. Their incentive is their compensation and their ability to gradually sell off their stockholdings before the truth becomes widely known. First they defrauded the MBS investors, then they defrauded the homeowners, then the taxpayers and now their shareholders.

“After this, I’ll never buy again,” Ms. Sweetland says. “This is not the American dream. This is not my American dream.”

“In half a dozen more cases examined by The New York Times, Bank of America rejected short sale offers, foreclosed and auctioned off houses at lower prices.
“The aversion to short sales also leads banks to take many months to process applications, and some lenders set unrealistically high sales prices — known as broker price opinions — and hire workers who say they are poorly trained. [EDITOR’S COMMENT: WHY WOULD YOU USE BROKERS WHEN THERE ARE TENS OF THOUSANDS OF APPRAISERS AVAILABLE? ANSWER: BECAUSE YOU LIKE THE ANSWER FROM THE BROKERS AND DON’T LIKE THE ANSWER YOU WOULD GET FROM APPRAISERS]

EDITOR’S NOTE: It all seems so counter-intuitive, doesn’t it? Banks, if they were really acting like banks, would want and be required to mitigate their losses. So why take an $18,000 loss when you could have taken a $6,000 loss? And why is this the rule rather than the exception? The answer lies in the accounting rules. The banks are carrying illusory assets that they don’t actually own at a value that cannot withstand the reality of fair market value.

Let’s pretend that the original mortgages were valid. We’ll pretend that the note was correct in that it described and disclosed the creditor who advanced the money for the loan. We’ll pretend that the mortgage or deed of trust secured the note with an encumbrance on the home. (None of these things are true, but we’ll go along with the illusion for the moment). Now let’s also pretend that the proper assignments and endorsements were properly executed and delivered. (Also not true). And finally we’ll pretend that the the proper documents were properly recorded, so that the lender of record is the one who actually loaned the money. (Also not true). THEN we have to pretend that the mortgage loans that were, according to the securitization documents, assigned to a valid trust (REMIC, SPV). AND we are required to make a giant leap of faith and say that even though the trusts received the assignments, the servicers were allowed to record the loans as their own assets, even though they never loaned any money.

Okay, all of that is a stretch beyond the breaking point, but let’s assume it is true for the moment. Under that scenario, Bank of America through BAC and others like it would  have the authority to execute documents. If they had a situation in which someone was selling the house and they were coming to the table with the money required to pay off the mortgage, BOA would have the right, power and obligation to execute a satisfaction of mortgage. You could even force them to, if they refused. If they had a situation in which someone didn’t have the extra money to come to the table and pay-off the entire loan, they would have the power to accept the lesser amount (a short-sale) and execute a satisfaction of mortgage (or reconveyance in non-judicial states). So if a foreclosure would cost them more than the short-sale, they would obviously accept the short-sale, right? Wrong.

Even accepting the ridiculously flawed scenario described above, BOA would avoid short-sales like the plague. The reason is that they are carrying the “assets” on their books at full value — the principal due according to the note (even though, if there is an asset it actually belongs to someone else). So if the principal due is $200,000 and they accept a short-sale at $100,000, they are required by the accounting rules to take the loss on their books. That means taking $100,000 off their balance sheet and taking a “one-time” write-off on their income statement of $100,000. Investors and shareholders might forgive one or two like that, but if it became a regular thing, then the whole “one-time write-off” thing might get a little tiresome — i.e., not credible.

But if they foreclose and the property is sold to their own REO at $75,000, even though they have increased their loss from $100,000 to $125,000, their books are unchanged. There is not write-down of assets and there is no loss to report in income. So the choice is whether they take a loss of $100,000 on a  short-sale or not report any loss at all. For those of you who are not schooled in the world of equities and the stock market, that $100,000 loss may well translate into a $1 million loss in the value of their stock. That is because stocks trade at a price-earnings ratio. If investors use the $100,000 loss and compute it into earnings, and the stock is trading at 10 times earnings, then the short-sale decreased their stock value by $1 million whereas the foreclosure has no effect.

Now go back and take away all of the false presumptions and you can see the scope of the problem that BOA and others face. If reality is introduced into the picture, a substantial bulk of their entire capital structure is literally absent. Dig a little deeper and you’ll see that the “trading profits” are not real either. Whereas 7,000 banks report the their assets and income in accordance with reality, the mega banks are allowed to report based upon a grotesque hallucination. Something, I suppose arrogance, keeps the leaders of these supposedly large institutions in a bubble of belief that this won’t burst. When in all of human history has the bubble evolved into a permanent structure? I don’t know of any.

October 24, 2010

Short Sales Resisted as Foreclosures Are Revived

By MICHAEL POWELL

PHOENIX — Bank of America and GMAC are firing up their formidable foreclosure machines again today, after a brief pause.

But hard-pressed homeowners like Lydia Sweetland are asking why lenders often balk at a less disruptive solution: short sales, which allow owners to sell deeply devalued homes for less than what remains on their mortgage.

Ms. Sweetland, 47, tried such a sale this summer out of desperation. She had lost her high-paying job and drained her once-flush retirement savings, and her bank, GMAC, wouldn’t modify her mortgage. After seven months of being unable to pay her mortgage, she decided that a short sale would give her more time to move out of her Phoenix home and damage her credit rating less than a foreclosure.

She owes $206,000 and found a buyer who would pay $200,000. Last Friday, GMAC rejected that offer and said it would foreclose in seven days, even though, according to Ms. Sweetland’s broker, the bank estimates it will make $19,000 less on a foreclosure than on a short sale.

“I guess I could salute and say, ‘O.K., I’m walking, here’s the keys,’ ” says Ms. Sweetland, as she sits in a plastic Adirondack chair on her patio. “But I need a little time, and I don’t want to just leave the house vacant. I loved this neighborhood.”

GMAC declined to be interviewed about Ms. Sweetland’s case.

The halt in most foreclosures the last few weeks gave a hint of hope to homeowners like Ms. Sweetland, who found breathing room to pursue alternatives. Consumer advocates took the view that this might pressure banks to offer mortgage modifications on better terms and perhaps drive interest in short sales, which are rising sharply in many corners of the nation.

But some major lenders took a quick inventory of their foreclosure practices and insisted their processes were sound. They now seem intent on resuming foreclosures. And that could have a profound effect on many homeowners.

In Arizona, thousands of homeowners have turned to short sales to avoid foreclosures, and many end up running a daunting procedural gantlet. Several of the largest lenders have set up complicated and balky application systems.

Concerns about fraud are one of the reasons lenders are so careful about short sales. Sometimes well-off homeowners want to portray their finances as dire and cut their losses on a property. In other instances, distressed homeowners try to make a short sale to a relative, who would then sell it back to them (a practice that is illegal). A recent industry report estimates that short sale fraud occurs in at least 2 percent of sales and costs banks about $300 million annually.

Short sales are also hindered when homeowners fail to forward the proper papers, have tax liens or cannot find a buyer.

Because of such concerns, homeowners often are instructed that they must be delinquent and they must apply for a modification first, even if chances of approval are slim. The aversion to short sales also leads banks to take many months to process applications, and some lenders set unrealistically high sales prices — known as broker price opinions — and hire workers who say they are poorly trained. [EDITOR’S COMMENT: WHY WOULD YOU USE BROKERS WHEN THERE ARE TENS OF THOUSANDS OF APPRAISERS AVAILABLE? ANSWER: BECAUSE YOU LIKE THE ANSWER FROM THE BROKERS AND DON’T LIKE THE ANSWER YOU WOULD GET FROM APPRAISERS]

As a result, quite a few homeowners seeking short sales — banks will not provide precise numbers — topple into foreclosure, sometimes, critics say, for reasons that are hard to understand. Ms. Sweetland and her broker say they are confounded by her foreclosure, because in Arizona’s depressed real estate market, foreclosed homes often sit vacant for many months before banks are able to resell them.

“Banks are historically reluctant to do short sales, fearing that somehow the homeowner is getting an advantage on them,” said Diane E. Thompson, of counsel to the National Consumer Law Center. “There’s this irrational belief that if you foreclose and hold on to the property for six months, somehow prices will rebound.”

Homeowners, advocates and realty agents offer particularly pointed criticism of Bank of America, the nation’s largest servicer of mortgages, and a recipient of billions of dollars in federal bailout aid. Its holdings account for 31 percent of the pending foreclosures in Maricopa County, which includes Phoenix and Scottsdale, according to an analysis for The Arizona Republic.

The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times in collaboration with two real estate agents, the bank’s system repeatedly asked for and lost the same information and generated inaccurate responses.

In half a dozen more cases examined by The New York Times, Bank of America rejected short sale offers, foreclosed and auctioned off houses at lower prices.

“When I hear that a client’s mortgage is held by Bank of America, I just sigh. Our chances of getting an approval for them just went from 90 percent to 50-50,” said Benjamin Toma, who has a family-run real estate agency in Phoenix.

Bank of America officials also declined interview requests. A Bank of America spokeswoman said in an e-mail that the bank had processed 61,000 short sales nationwide this year; she declined to provide numbers for Arizona or to discuss criticisms of the company’s processing.

Fannie Mae, the mortgage finance company with federal backing, gives cash incentives to encourage servicers, who are affiliated with banks and who oversee great bundles of delinquent mortgages, to approve short sales.

But less obvious financial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance.

Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.

Short sales, to be sure, are no free ride for homeowners. They take a hit to their credit ratings, although for three to five years rather than seven after a foreclosure. An owner seeking a short sale must satisfy a laundry list of conditions, including making a detailed disclosure of income, tax and credit liens. And owners must prove that they have no connection to the buyer.

Still, bank decision-making, at least from a homeowner’s perspective, often appears arbitrary. That is certainly the view of Nicholas Yannuzzi, who after 30 years in Arizona still talks with a Philadelphia rasp. Mr. Yannuzzi has owned five houses over time, without any financial problems. When his wife was diagnosed with bone cancer, he put 20 percent down and bought a ranch house in North Scottsdale so that she would not have to climb stairs.

In the last few years, his wife died, he lost his job and he used his retirement fund to pay his mortgage for five months. His bank, Wells Fargo, denied his mortgage modification request and then his request for a short sale.

The bank officer told him that Fannie Mae, which held the mortgage, would not take a discount. At the end of last week, he was waiting to be locked out of his home.

“I’m a proud man. I’ve worked since I was 20 years old,” he said. “But I’ve run out of my 79 weeks of unemployment, so that’s it.”

He shrugged. “I try to keep in the frame of mind that a lot of people have it worse than me.”

Back in Phoenix, Ms. Sweetland’s real estate agent, Sherry Rampy, appeared to receive good news last week. GMAC re-examined her client’s application and suggested it might be approved.

But the bank attached a condition: Ms. Sweetland must come up with $2,000 in closing costs or pay $100 a month for 50 months to the bank. Ms. Sweetland, however, is flat broke.

A late afternoon desert sun angles across her Pasadena neighborhood.

“After this, I’ll never buy again,” Ms. Sweetland says. “This is not the American dream. This is not my American dream.”

14 Responses

  1. […] This post was mentioned on Twitter by Chris Lewis, Tom Garrett. Tom Garrett said: Home Seller Assist Why Short-Sales Are Being Rejected « Livinglies's Weblog: EDITOR'S NOTE: In my … http://bit.ly/bTKGZF http://www.REOFunds.net […]

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  3. Income distribution – is a new economic topic of interest. Somehow- we lost it. According to astute economists, the issue was resolved decades ago – by regulatory reform. But, those regulatory reforms were taken away in the most recent decade by politicians who were in the pocket of the most powerful. And now, we face the same issues that we faced many decades ago – that we thought were resolved.

    There are huge political agendas that have prevented exposure of the mortgage fiasco that nearly crippled our country. Talking to contacts tonight – and, no matter what – those in power will fight principal reduction – even though they know foreclosures are laced with fraud and mortgage title is non-existent. This, my friends, is because the bank power continues in Washington. It does not matter who is in office – huge campaign donations come from the banks who control Washington.

  4. What’s so hard to understand about why the banks want foreclosure above all else? A house is tier 1 capitol that they can get maximum leverage from thus appearing more solvent.

    this stuff ain’t hard figure out folks when you take into account what the financial condition of the banks are. Banks get to leverage 30-1 while the common man gets to leverage .30-1.

  5. Eule,
    Thank you for the article.
    I said this before, top 1% are rolling in money, while the rest is
    left with nothing !!

    Johnston writes that while the number of Americans earning more than $50 million fell from 131 in 2008 to 74 in 2009, those that remained at the top increased their income from an average of $91.2 million in 2008 to almost $519 million.

  6. Let me get this straight,
    According to you, we can FORCE the banks to execute a Satisfaction of Mortgage, even if they don’t want to!!
    How? Why? ”
    Wouldn’t this solve all of our problems without having to wade thru Hell and High water to fix this?

    If we can prove that our notes have been sold over and over, can’t we use the record from the county? After we raised Hell, the banks started recording things 2007, 2009 and 2010, but not much, enough to prove that MERS was assigning things, though!

    “If they had a situation in which someone was selling the house and they were coming to the table with the money required to pay off the mortgage, BOA would have the right, power and obligation to execute a satisfaction of mortgage. You could even force them to, if they refused.”

  7. Here is a Video and Story what every Banker should see .

    from Huffington post :

    http://www.huffingtonpost.com/2010/10/25/income_inequality_statistics_tax_code__n_773392.html

  8. For the life of me, I can’t understand this. If a bank can’t legally foreclose, how can it legally modify that loan?

    How is Wells Fargo staying out of the news? They are in the MERS mess too. I know because mine is one of their loans and the mortgage record shows MERS, but only shows the local mortgage company and MERS, no mention of Wells Fargo. I guess that brings me to another question, do some lenders legally use the MERS system? Is that even possible.

    For the average person, all of this is so confusing.

  9. Sorry for my ignorance but why the banks have in they balance sheet the mortgage ,if they are not the owner of the note ?they are just the servicer of the mortgage in behalfm of the investor

  10. Again this is an easy Fix. -STOP your MORTGAGE Payment. They can not foreclose on millions of US Home owners. Let’s shut down the system and teach these dirty bastards a lesson. The is includes the government who cuddle the banks. Get their A$$ out of congress.

  11. great read on mandelman matters: The signing

  12. This is a post asking for some advice and information regarding The IndyMac/Deutsche bank trust issue.

    My loans are current and I recently requested to see the original mortgage note (section 6 RESPA) and was given a form letter asking for a fee to produce it. In the response they say my mortgage is part of the Indx 2006 ar33 pool (subsequently I have identified it from the post of June 15th on this blog). My issue is that I am tired of aiding and abetting a fraudulent system and I really do not know if my mortgage payment is being applied to the “right” place. As many here have done, I refinanced in 2006 thinking that rates had no where to go but up (currently have 6.25%) and with the benefit of hindsight that was the wrong thing to do. As stated I am current with all payments and my end game with filing the RESPA request was to see the original note but I am unsure if that will actually accomplish anything other than for them to produce some piece of paper that says they have the right to service the mortgage. My end game in all of this is to try and get IndyMac/ whoever the holder is- to lower my rate down to a market level with them paying the cost to do so. I have also decided to stop paying the mortgage (but put the payments into an interest-bearing account so I demonstrate that I am not just being irresponsible with my request)-they will be released when I have some sort of proof they can collect legally.

    I guess what I am asking is am I barking up the wrong tree simply asking IndyMac to produce a mortgage note? Since it is is some form of trust (ar33) who really owns this? Also the form letter said it “may or may have not been sold”- what the hell does that really mean-no responsibility?

    Can anyone help me as I’m trying to get out in front of this so that I stop helping the system continue to defraud all of us.

    Any advice is greatly appreciated!!

    M

  13. Any insight as to 10-99 abuse after foreclosure? Chase foreclosed illegally and placed my home into REO. The home was appraised for my refi in 2006 for 1.1m. They foreclosed and sold the home into REO in 2009 and then 10-99’d me for $1,000,000.

  14. In a short sale the ponzi scheme is exposed. In a foreclosure the Ponzi scheme has more chances not to be exposed because in most cases the borrower is removed from the Ponzi equation.

    Plus what is going on with the Title insurance.

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