I've been trying to finish up two short sales with a conventional lender. I listed them in late October and executed contracts the first week of December.
Each property had about $85k remaining on the mortgage. Property values have plummeted in this particular part of town and the vacant homes in the area are vandalized, further driving down values. The BPOs came in at $29k on each of them and we had cash contracts at $28,800.
With the holidays, we got the files into the lender in January. By the middle of February, we find out that both files were declined when the lender could not contact the seller. I checked and both the email address and phone number were correct.
The second pass through was somewhat better and at least we got the files processed. The bank does their BPOs and all looks well. Last week we finally get a response on the first file. While the lender is good to go, the PMI company wants the seller to hold a $20,000 note for 6 years. In 75-plus short sales I've never seen anyone ask for more than $5,000 from a seller and only had to get a seller to carry a note once. The seller really did not want a foreclosure and offered them $5,000. It took less than four hours for it to be declined.
By allowing the property to go into foreclosure they cost themselves about $20k which is not recoverable. The lender will take back the property and evict the tenants. Once vacant, the properties will be vandalized within days. What's worth $29k today will be worth $19k so the lender will lose another $10k.
If they had moved forward with the short sale, the PMI company would have recovered $5k from the seller, the lender would have come out $10k better, and the neighborhood would be that much closer to stabilizing.
The original note was $87,500 and the PMI was likely 25% or $21,875. The seller has been paying the premium for 5 years. It appears the PMI company wants come out even or ahead on this sale.
Are PMI companies the new short sale train wreck?
Tom Branch and Gina Branch, The Branch Team with RE/MAX Dallas Suburbs, service the greater North Dallas suburbs including Dallas, Plano, Allen, McKinney, Frisco, Lewisville, and Carrollton. While Gina concentrates on traditional listings and buyer/tenant representation, Tom specializes in assisting distressed homeowners to avoid foreclosure. Tom and Gina have published two books (Achieving Rock Star Status and The Field Guide to Short Sales) and are available for speaking engagements in the greater Dallas - Fort Worth Metroplex. Subscribe to The Branch Team Blog.
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Old school short sale train wreck. My very first one back in 2008 had a $20K note to it, seller declined and it fell through. Just had another fall through because they wanted $26K IN CASH AT CLOSE and REFUSED to offer a promissory note.
Just when you think you have the game down they always change the rules :-/
Just what we need: One more major hurdle to jump and one more killer of deals. Thanks for the heads up Tom.
This is a nightmare. Can these people not do math? Great post!
They do not make sense at times!!
All the numbers at the end of the day confused me, but I will agree with I recently had my very first short sell lender come back asking for a promissory note and what was the amount? Your $5,000 comment is right on the nose. 2010 brought my 1st: 1. short sale automoted rejection based on systematic value in seconds without anyone sending an appraiser or BPO to check condition (poor) (BoA via Equator) 2. short sale lender ignore me (2 small banks) 3. short sale lender get bought out midstream (Wilshire by BoA) and 4. Lender ask for promissory note ($5,000 -- seller said whatever, who knows if he's paying it.) Very interesting year. Where did all the BPOs come from? Three counties over. And they wonder why they/we don't have accurate values on these deals?
Short Sales are harder to do now than they were prior to the Home Affordability Act, In 2008 the banks evenutally made decisions, in 2009 they were harder to come by and I lost more deals...
It is amazing what we go through to sell a $30,000 home! :-) Another agent in my office was working on a short sale and just had a similar problem with the PMI company. Then last week, one of my buyers received notice that the PMI underwriters did not approval the appraisal on the home they wanted to buy.
Until Lenders get their heads out of their butts we are in trouble. I don't know why Obama is so worried about the CEO or BP taking a day off from the Oil Spill when Obama can take a day or more off from the mess we are in. Why doesn't he talk to those of us who know what is going wrong? He would rather talk to a monitor and invent problems to fix.
Lenders, the Gov't, and the movers and shakers of the industry are just not prepared to actually do what would be needed to really fix the problems that we have, so when you add the PMI companies in the mix, its like gasoline for the fire. I am optimistic but still mindful of what is to come because this down economy will remain the same for quite some time with the enormous inventory that exist is still to come.
IN this area we don't have a lot of PMI. Most of loans have a second or heloc attached to them. However, the mortgage insurance the bank carries on the second sometimes derails a short sale. The second lender will not release because they would get a better deal from foreclosure and insurance payoff rather than short sale and a few thousand from the first.
Marcy
Wow...very dishearterning...not surprising when there is no single entity in charge driving the bus, but more like an unmanned car with multiple backseat drivers.
I used to list short sales all the time... but with the recent changes... They take too much time- and just end up getting rejected... I will helpa buyer buy them- but i am not looking to list them anymore...
Well I'm not sure what the PMI company got out of this - but it is actually advantageous for banks to foreclose vs. short sale in some instances. Sometimes it's the servicer, sometimes the bank. The moniker banksters seems fitting. Just let one of us try their shenanigans and see where we end up!
Renee is a voice of reason....she clearly works many of these deals and her great experience shows.
Damon, unless you expect the leader of the free world to take his finger off the hot button and negotiate your next deficiency judgment, wouldn't it be more useful for us to leave politicians out of this?
Sharon: banks (great big banks) are moving their mouths on the "short sale" and "loan mod" pr programs, and yet, as you say, it may be advantageous for banks "or whoever holds the note" to foreclose on the note (or offer a DIL) and get the property before it disintegrates.
Several weeks ago I had a short sale, approved HUD, approved seller, approved buyer -- suddenly come back out of underwriting with a request for an additional $30,000+ to get a clear to close. It went to foreclosure two weeks ago. I still don't understand and big bank won't explain the "approval" and then a last minute request for $30,000+.
There is every indication that the approval standards of the lenders and lien holders are becoming more precise. The move to file deficiency judgments -- especially for 2nd positions after a short sale, will become a nasty hangover for the next few years.
Tom another great post. Just what we need is another hurdle or deal killer for these short sales. Thanks for sharing this with us
t
PMI can be a deal killer. I don't understand the reasoning of some of them.
I'm old enough to remember when PMI came into existence. I thought it was a rip-off then and now, when they need to pay out, this is what they do?
Tom, well you have given me a reason to call my underwriting guru to get the skinny on MI and short sales. I will come back if I uncover any dirt that can be useful. The only good news that I can think of is that there were very, very few loans done with MI in the past decade (at least in California). MI was not tax deductible untl the last 90's and the mortgage industry did a masterful job of selling around it with the 80/10/10. And, sub-prime didn't have MI at all.
Many comments are right on target, IMHO. Leslie, spot on. My only thoughts are (and, I might just be throwing myself under a bus on this), is that I think banks are warranted to deficency judgements when the second is a non-purchase lien. After all, it has nothing to do with decreasing value...the consumer took the cash out to drive it, wear it, or vacation in it........... Christine, I don't get most of the lenders or the MI companies or the administration's stand that "it would be nice" to work with consumers to save their homes. Lynn...PMI or any type of insurance, isn't that what they do?????? How many of us carry insurance, but will not file a claim because we are afraid of the results?
Tom,
A very interesting post that brings out the frustration of the current ever changing hurdles that short sale agents, sellers, and buyers go through.
Tom The world will be a better place when short sales go away
Short sales. . .they do not take the common sense path. . they have their own agenda. I learned to work around it.
I wish there was a way to avoid PMI for the average person. This is one of the many reasons VA loans are so good. Its a TRUE 100% loan with no PMI monthly or upfront, there is a one time finding fee though.
PMI is the new (and the old) train wreck. In 2007 I had a very tought short sale with a PMI train wreck, so I think this probelm has been around for awhile--definitely a huge bump inthe road to success in closing these things.
Leslie, if the bank had a written approval provided to the buyer and seller, full blown approval in writing, then I wonder if the principals have any recourse. You did have someone with equitable title (buyer) and someone who proceeded to spend more money, perhaps, on further inspections, appraisal for their loan (buyer) and it seems logical to me the bank maybe can't do that. In Texas, our short sale addenda has basically a 2nd or amended executed date whereby once the bank provides notice of approval, the contract is no longer contingent on that approval and parties start moving out and moving on. It would seem they (short sale bank) could be held accountable for "changing their mind" much the way a principal to the transaction can be in default. Very curious.
PMI companies have always been difficult to deal with. Quite normal for them to want a seller contribution. We just have to negotiate the contribution down as low as we can and then let the seller make a decision. We can't help everybody.
It's getting to be like a horror movie with all these zombie corporations stumbling around .. devouring our free time and patience .. I will say this, though.
It seems like when you "approve a deal" that's an approval. Changing the terms at the last second is not good business, it's extortion tactics. On principle, American companies should not behave like that. Stick to your word, and make your words mean something!!
Wow another hurdle with short sales. I promised not to get so old that I would yearn for the "good old days" but here it comes....middle age and remembering how easy it was to do a short sale 15 years ago when the borrower actually had a true hardship. What happened to the I in insurance? The borrower pays up front premiums and monthly payments to insure the lender in the event of a default. Isn't that exactly what PMI is in the first place? Why would you pay car insurance if it did not cover you in an accident?
I just got a request from the negotiator form the Mortgage Insurer on one of my short sales. They asked the seller/borrower to pay $54,000 or sign a promissory note for $108,000. Yikes! If the borrower/seller had that money, he would be making his mortgage payments and not doing a short sale. What are they thinking?
In essence, the PMI Co's got caught with their "pants down". The co's did not reserve enough to pay the mountain of claims that are floating around. For some odd reason, they didn't see the wave of foreclosures coming. The business model is the same as it was in the 80's & 90's; PMI Premiums Collected / by Claims Paid = Premium Charged. When you don't have many claims, as prior to 2005, the pmi premium is low and the State Insurance Boards didn't require the reserves required to pay claims. Gee, I wonder where that money went??
See where I'm going with this? PMI Co's can't pay claims so they make requests for promissory notes from sellers that have already paid for PMI premium. Don't forget , when the original loan was closed, the PMI Co. signed off on the premium amount by proxy. So, when is a deal a deal? A contract a contract? I guess it's a deal or a contract when you don't have to pay a PMI Claim, but when my pmi co. might loose $$ it's not a deal or a contract and I'm not going to take the hit. I'll go back to the consumer and make some ridiculous demand for a promissory note or better demand more cash.
It's only going to get worse.
Will be interesting to see how this all plays out. Lots of twists and turns in our current circumstances.
I am seeing the banks tighten up on what they're giving up. I have a second mortgage not giving up any more than the first mortgage. My sellers can't come up with $16000.
Kristen, what you write sounds so reasonable....and yet despite everything we tried to shake loose, we don't understand what happened and they're not talking. Our cycle is "acceptance = approval", HUD, tweaking, HUD, tweaking, HUD, close. Still baffled, client(s) sad and frustrated, and all we have are suspicions.
I have another one frighteningly close to the scenario in Tom's post. I wonder how many short sales are going to be disallowed because of the 2nd with PMI issue? Would love to see stats.
Thanks, Tom