Some might blame the banks for the prices of houses declining, and I would agree to a point. While the banks are not the only problem, or even the major problem, they are a contributing factor in today’s market. The entire problem is too complicated to explain in a single article or blog post, but I will do my best to spell out the banks part in this mess.
Last week I was contacted by Rick Kupchella from
Kare 11 News
about the relationship between Short Sales and foreclosures and how this is affecting the market. Here is the video that aired on
Kare 11 Extra
on 3/29/2009.
Extra: Banks moving slow on home sales
I spent several hours with Rick talking about the challenges the everyone faces with Short Sales and why so many of them never get accepted and why the properties eventually make it back to the banks as an REO (Real Estate Owned – This is the name of the division within banks that owns the properties from foreclosure) and eventually sell for as much as half of what the bank could have received if they accepted the Short Sale offer several months ago.
The first thing that you have to realize is that when the housing markets first started to decline, most people never heard the term Short Sale. I have talked to many Realtors and Mortgage Brokers who have been in the business for several years that have just recently heard the term Short Sale. So two years ago, only the realtors and investors who specialized in foreclosures and pre-foreclosures knew what a Short Sale was. Also at this time, the markets were just starting to decline which made Short Sales more popular and the lenders didn’t want to accept such deep discounts from investors because they thought the properties were still worth at least as much as the mortgage balances. This is the reason in the beginning why the lenders were not accepting Short Sale Offers.
When the lenders foreclosed on these properties, the markets had already declined and the condition of the properties had also declined from the time of the initial Short Sale offer to the time that the banks owned the properties. As these properties sat on the market, they were forced to lower the prices to get a fast sale. This is also about the time that everyone’s adjustable rate mortgages started to adjust and when they went to refinance, they found that because of the bank owned properties on the market, they were not able to get an appraisal to match what they owed on their properties so they could no longer refinance.
This caused a lot of people to sell their houses which flooded the markets with inventory. This also precipitated a further decline in property values. Once the lenders caught on to the fact that property values were declining, they started to agree to lower Short Sale offers, but at this time, the offers were coming in even lower than the banks were willing to go, because they were working on current values and we were making our offers on future values because of the continues decline in values. This continued the increase in properties that went to foreclosure which increased the number of houses on the market that were bank owned properties. The more bank owned properties there are on the market, the lower the market values continue to decline.
By this time the term Short Sale was very popular in the real estate industry. Every Realtor, Mortgage Broker and investor now knew what a Short Sale was and how to work one. This is when the Loss Mitigators at the banks became overwhelmed by the sheer volume of Short Sale files that they now had to work, which started to cause the long delays in their response times to Short Sale offers.
By now the lenders were willing to accept deep discounts on Short Sale offers to prevent the foreclosures, but the loss mitigators simply couldn’t keep up with the volume of files they had to work and many times the properties went to foreclosure or the buyers simply walked away from the deal because it was taking so long to get an answer from the loss mitigators.
In November 2008
FannieMae
and
Freddie Mac
put a hold on foreclosures so that they had the time to hire and train new Loss Mitigators. By the time they were ready to go, congress and the president of the United States started advertising to the general public that they should contact their lenders to negotiate a Short Sale or mortgage modification, which just happens to be the job of the loss mitigators. So now that the banks had enough trained loss mitigators to handle the sheer volume of Short Sale offers, they also had to deal with the rest of the general public to negotiate a loan modification.
Because of the advertising that congress and the presidents administration did in the 4th Quarter of 2008 and the 1st Quarter of 2009, the entire population of the United States of America knew what a Short Sale and a loan modification was and they overwhelmed the banks and the loss mitigators to the point that the loss mitigators simple couldn’t respond to everyone on time.
This is one of the many reasons why in January and February 2009 50% - 60% percent of all transaction as reported by the
Nation Association of Realtors
was a lender mitigated sale, which means that the sale was either a Short Sale or a foreclosure, and my belief is that the majority of those sales were Bank REO’s.